UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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COSTAMARE INC.
(Exact name of Registrant as specified in its charter)
NOT APPLICABLE
(Translation of Registrant’s name into English)
Republic of The Marshall Islands
(Jurisdiction of incorporation or organization)
60 Zephyrou Street &
Syngrou Avenue
17564 Athens Greece
(Address of principal executive offices)
Konstantinos Zacharatos Secretary
60 Zephyrou Street &
Syngrou Avenue
17564 Athens Greece
Greece Telephone : +30-210-949-0050 Facsimile : +30-210-949-6454
(Name, Address, Telephone Number and Facsimile Number of Company contact person)
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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Title of Each Class |
Name of Each Exchange on Which Registered |
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Common Stock, $0.0001 par value per share |
New York Stock Exchange |
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Preferred stock purchase rights |
New York Stock Exchange |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(d) OF THE ACT: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. As of December 31, 2011, there were 60,300,000 shares of the registrant’s common stock outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes £ No S
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes £ No S
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes S No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes £ No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer £ |
Accelerated filer S |
Non-accelerated filer £ |
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.
U.S. GAAP S International Financial Reporting Standards as issued by the International Accounting Standards Board £ Other £
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 £ Item 18 £
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No S
TABLE OF CONTENTS
Page
ii
ii
1
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISERS
1
OFFER STATISTICS AND EXPECTED TIMETABLE
1
KEY INFORMATION
1
INFORMATION ON THE COMPANY
29
UNRESOLVED STAFF COMMENTS
44
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
45
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
77
MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS
81
FINANCIAL INFORMATION
86
THE OFFER AND LISTING
87
ADDITIONAL INFORMATION
88
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
103
DESCRIPTION OF SECURITIES OTHER THAN EQUITY
SECURITIES
105
106
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
106
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF PROCEEDS
106
CONTROLS AND PROCEDURES
106
AUDIT COMMITTEE FINANCIAL EXPERT
107
CODE OF ETHICS
107
PRINCIPAL ACCOUNTANT FEES AND SERVICES
107
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
COMMITTEES
108
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
AFFILIATED PURCHASERS
108
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
108
CORPORATE GOVERNANCE
108
MINE SAFETY DISCLOSURE
109
110
FINANCIAL STATEMENTS
110
FINANCIAL STATEMENTS
110
EXHIBITS
110
F-1 i
In this annual report, unless otherwise indicated, references to “Costamare”, the “Company”, “we”, “our”, “us” or similar terms when used in a historical context refer to Costamare Inc., or any one or more of its subsidiaries or their predecessors, or to such entities collectively. All statements in this annual report that are not statements of historical fact are “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995. The disclosure and analysis set forth in this annual report includes assumptions, expectations,
projections, intentions and beliefs about future events in a number of places, particularly in relation to our operations, cash flows, financial position, plans, strategies, business prospects, changes and trends in our business and the markets in which we operate. These statements are intended as forward-
looking statements. In some cases, predictive, future-tense or forward-looking words such as “believe”, “intend”, “anticipate”, “estimate”, “project”, “forecast”, “plan”, “potential”, “may”, “should”, and “expect” and similar expressions are intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements. In addition, we and our representatives may from time to time make other oral or written statements which are forward-looking statements, including in our periodic reports that we file with the Securities and Exchange Commission (“SEC”), other
information sent to our security holders, and other written materials. Forward-looking statements include, but are not limited to, such matters as:
•
future operating or financial results and future revenues and expenses; • future, pending or recent acquisitions, business strategy, areas of possible expansion and expected capital spending or operating expenses; • availability of key employees, crew, length and number of off-hire days, dry-docking requirements and fuel and insurance costs; • general market conditions and shipping industry trends, including charter rates, vessel values and factors affecting supply and demand; • our financial condition and liquidity, including our ability to make required payments under our credit facilities, comply with our loan covenants and obtain additional financing in the future to fund capital expenditures, acquisitions and other corporate activities; • the overall health and condition of the U.S. and global financial markets, including the value of the U.S. dollar relative to other currencies; • the financial stability of our counterparties, both to our time charters and our credit facilities, and the ability of such counterparties to perform their obligations; • our expectations about availability of vessels to purchase, the time that it may take to construct and deliver new vessels, including our newbuild vessels currently on order, or the useful lives of our vessels; • our continued ability to enter into period time charters with our customers, including the re-chartering of vessels upon the expiry of existing charters, or to secure profitable employment for our vessels in the spot market; • our expectations relating to dividend payments and ability to make such payments; • our ability to leverage to our advantage our managers, relationships and reputation within the container shipping industry; • our anticipated general and administrative expenses; • environmental and regulatory conditions, including changes in laws and regulations or actions taken by regulatory authorities; • risks inherent in vessel operation, including terrorism, piracy and discharge of pollutants; • potential liability from future litigation; and • other factors discussed in “Item 3. Key Information—D. Risk Factors” of this annual report. ii
We caution that the forward-looking statements included in this annual report represent our estimates and assumptions only as of the date of this annual report and are not intended to give any assurance as to future results. Assumptions, expectations, projections, intentions and beliefs about future
events may, and often do, vary from actual results and these differences can be material. The reasons for this include the risks, uncertainties and factors described under “Item 3. Key Information—D. Risk Factors”. As a result, the forward-looking events discussed in this annual report might not occur and
our actual results may differ materially from those anticipated in the forward-looking statements. Accordingly, you should not unduly rely on any forward-looking statements. We undertake no obligation to update or revise any forward-looking statements contained in this annual report, whether as a result of new information, future events, a change in our views or expectations or otherwise. New factors emerge from time to time, and it is not possible for us to predict all
of these factors. Further, we cannot assess the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to be materially different from those contained in any forward-looking statement. iii
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. A. Selected Financial Data The following table presents selected consolidated financial and other data of Costamare Inc. for each of the five years in the five-year period ended December 31, 2011. The table should be read together with “Item 5. Operating and Financial Review and Prospects”. The selected consolidated
financial data of Costamare Inc. is a summary of, is derived from, and is qualified by reference to, our audited consolidated financial statements and notes thereto, which have been prepared in accordance with U.S. generally accepted accounting principles, or “U.S. GAAP”. Our audited consolidated
statements of income, stockholders’ equity and cash flows for the years ended December 31, 2009, 2010 and 2011 and the consolidated balance sheets at December 31, 2010 and 2011, together with the notes thereto, are included in “Item 18. Financial Statements” and should be read in their entirety.
Year Ended December 31,
2007
2008
2009
2010
2011
(Expressed in thousands of U.S. dollars, except for share and per share data) STATEMENT OF INCOME Revenues: Voyage revenue
$
370,121
$
426,348
$
399,939
$
353,151
$
382,155 Expenses: Voyage expenses
2,780
3,735
3,075
2,076
4,218 Voyage expenses—related parties
—
—
—
410
2,877 Charter agreement early termination fee
—
—
—
9,500
— Vessels’ operating expenses
124,666
148,350
114,515
102,771
110,359 General and administrative expenses
466
2,608
1,716
1,224
4,958 Management fees—related parties
11,812
13,541
12,231
11,256
15,349 Amortization of dry-docking and special survey costs
3,095
6,722
7,986
8,465
8,139 Depreciation
50,710
72,256
71,148
70,887
78,803 Gain on sale of vessels
—
(95
)
(2,854
)
(9,588
)
(13,077
) Foreign exchange gains / (losses)
579
(235
)
535
273
(133
) Other income / (expenses)
301
(37
)
—
—
— Operating income
$
175,712
$
179,503
$
191,587
$
155,877
$
170,662 Other Income (Expenses): Interest income
$
3,589
$
5,575
$
2,672
$
1,449
$
477 Interest and finance costs
(62,568
)
(68,420
)
(86,817
)
(71,949
)
(75,411
) Other
188
109
3,892
306
603 Gain (loss) on derivative instruments
(1,498
)
(16,988
)
5,595
(4,459
)
(8,709
) Total other income (expenses)
$
(60,289
)
$
(79,724
)
$
(74,658
)
$
(74,653
)
$
(83,070
) Net Income
$
115,423
$
99,779
$
116,929
$
81,224
$
87,592 Earnings per common share, basic and diluted
$
2.46
$
2.12
$
2.49
$
1.65
$
1.45 Weighted average number of shares, basic and diluted
47,000,000
47,000,000
47,000,000
49,113,425
60,300,000 1
Year Ended December 31,
2007
2008
2009
2010
2011
(Expressed in thousands of U.S. dollars, except for share and per share
data) OTHER FINANCIAL DATA Net cash provided by operating activities
$
166,619
$
247,518
$
161,893
$
127,946
$
195,179 Net cash (used in) provided by investing activities
(257,550
)
(138,301
)
12,811
(23,850
)
(283,758
) Net cash (used in) provided by financing activities
93,099
(22,529
)
(252,684
)
43,396
26,801 Net increase (decrease) in cash and cash equivalents
2,168
86,688
(77,980
)
147,492
(61,778
) Dividends and distributions paid
(88,572
)
(279,778
)
(161,230
)
(10,000
)
(61,506
) BALANCE SHEET DATA (at period end) Total current assets
$
120,274
$
121,495
$
48,305
$
211,212
$
138,851 Total assets
1,674,665
1,815,500
1,710,300
1,828,782
1,982,545 Total current liabilities
177,575
287,534
183,271
184,788
226,589 Total long-term debt, including current portion
1,102,926
1,529,948
1,435,593
1,341,737
1,443,420 Total stockholders’ equity
521,453
(10,750
)
155,222
362,142
329,986
Average for the Year Ended December 31,
2007
2008
2009
2010
2011 FLEET DATA Number of vessels
46.2
52.8
47.3
42.4
47.8 TEU capacity
194,865
226,878
218,733
211,185
231,990 B. Capitalization and Indebtedness The following table sets forth our (i) cash and cash equivalents, (ii) restricted cash and (iii) consolidated capitalization as of December 31, 2011: This information should be read in conjunction with “Item 5. Operating and Financial Review and Prospects”, and our consolidated financial statements and the related notes thereto included elsewhere in this annual report.
As of December 31, 2011
(Expressed in thousands of U.S. dollars) Cash and cash equivalents
$
97,996 Restricted cash
$
46,078 Debt: Total long-term debt(1)(2)
$
1,443,420 Stockholders’ equity: Common stock, par value $0.0001 per share; 1,000,000,000 shares authorized on an actual basis and 1,000,000,000 shares authorized on an as adjusted basis; 60,300,000 shares issued and outstanding on an actual basis
$
6 Additional paid-in capital
$
519,971 Accumulated deficit
(48,854
) Accumulated other comprehensive loss
(141,137
) Total stockholders’ equity
329,986 Total capitalization
$
1,773,406
(1)
We had $153.2 million of undrawn borrowing capacity under our committed credit facilities as of December 31, 2011. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Credit Facilities”.
2
(2) All of our existing indebtedness is secured. C. Reasons for the Offer and Use of Proceeds Not applicable. D. Risk Factors Risks Inherent in Our Business Our growth depends upon continued increases in world and regional demand for chartering containerships, and the recent global economic slowdown may impede our ability to continue to grow our business. The ocean-going container shipping industry is both cyclical and volatile in terms of charter rates and profitability. Containership charter rates peaked in 2005 and generally stayed strong until the middle of 2008, when the effects of the recent economic crisis began to affect global container trade,
driving rates to their 10-year lows. Demand for containerships also declined significantly during 2008 and 2009. In late 2009 and 2010, there has been improvement on Far East-to-Europe and trans-Pacific container trade lanes, alongside improvements also witnessed on other, non-main lane, trade routes including certain intra-Asia and
North-South trade routes. However, from the end of the second quarter through December 31, 2011, container trade has weakened as the impact of the European sovereign debt crisis and economic slowdowns across the globe have affected international trade. Liner companies have experienced a
substantial drop-off in container shipping activity, resulting in decreased average freight rates in the second half of 2011, and the continuation of such decreased freight rates or any further declines in freight rates would negatively affect the liner companies to which we seek to charter our containerships.
The economics of our business have also been affected negatively by the large number of containership newbuild vessels ordered prior to the onset of the downturn. Accordingly, weak conditions in the containership sector may affect our ability to generate cash flows and maintain liquidity, as well as
adversely affect our ability to obtain financing. The factors affecting the supply and demand for containerships are outside of our control, and the nature, timing and degree of changes in industry conditions are unpredictable. The factors that influence demand for containership capacity include:
supply and demand for products shipped in containers; • changes in global production of products transported by containerships; • global and regional economic and political conditions; • developments in international trade; • environmental and other regulatory developments; • the distance container cargo products are to be moved by sea; • changes in seaborne and other transportation patterns; • port and canal congestion; and • currency exchange rates. The factors that influence the supply of containership capacity include:
•
the availability of financing; • the price of steel and other raw materials; • the number of newbuild vessel deliveries; • the availability of shipyard capacity; • the scrapping rate of older containerships; • the number of containerships that are out of service; • changes in environmental and other regulations that may limit the useful lives of containerships; 3
•
• the price of fuel; and • the economics of slow steaming. Consumer confidence and consumer spending recovered substantially from the low levels in 2008 and 2009 through the second quarter of 2011. Both indexes declined steeply during the second half of the year, reaching almost 2008-2009 levels, but have started to recover from these low levels during
the first two months of 2012. Our ability to re-charter our containerships upon the expiration or termination of their current time charters and the charter rates payable under any renewal options or replacement time charters will depend upon, among other things, the prevailing state of the containership
charter market, which can be affected by consumer demand for products shipped in containers. If the charter market is depressed when our containerships’ time charters expire, we may be forced to re-charter our containerships at reduced or even unprofitable rates, or we may not be able to re-charter
them at all, which may reduce or eliminate our earnings or make our earnings volatile. The same issues will be faced if we acquire additional vessels and attempt to obtain multi-year time charters as part of our acquisition and financing plan. Our liner company customers have been placed under significant financial pressure, thereby increasing our charter counterparty risk. The sharp decline in global economic activity in 2008 and 2009 resulted in a substantial decline in the demand for container shipping services. While demand for container shipping services has improved through the first half of 2011, resulting in increased cargo volumes and freight rates achieved by
liner companies, demand softened again through the end of 2011. The current weakness in demand for container shipping services and any future declines in such demand could result in financial challenges faced by our liner company customers and may increase the likelihood of one or more of our
customers being unable or unwilling to pay us contracted charter rates. We expect to generate most of our revenues from these charters and if our charterers fail to meet their obligations to us, we will sustain significant losses which could have a material adverse effect on our financial condition and
results of operations. An oversupply of containership capacity may prolong or further depress the current charter rates and adversely affect our ability to re-charter our existing containerships at profitable rates or at all. From 2005 through the first quarter of 2010, the size of the containership order-book was at historically high levels. Although order-book volume dropped in the first half of 2011 to relatively low levels, it has subsequently returned to historical average levels, and deliveries of vessels ordered at the
peak period will significantly increase the size of the container fleet over the next two years. An oversupply of newbuild vessel and/or re-chartered containership capacity entering the market, combined with any future decline in the demand for containerships, may result in a reduction of charter rates and
may decrease our ability to re-charter our containerships other than for reduced rates or unprofitable rates, or we may not be able to re-charter our containerships at all. Weak economic conditions throughout the world, particularly the Asia Pacific region and recent EU sovereign debt default fears, could have a material adverse effect on our business, financial condition and results of operations. Negative trends in the global economy emerged in 2008 and 2009, and although there was some improvement in 2010 and 2011, the global economy remains relatively weak. The current global recovery is proceeding at varying speeds across regions and is still subject to downside risks stemming from
factors like fiscal fragility in advanced economies, highly accommodative macroeconomic policies and persistent difficulties in access to credit. In particular, recent concerns regarding the possibility of sovereign debt defaults by European Union member countries, including Greece, disrupted financial
markets throughout the world, and may lead to weaker consumer demand in the European Union, the United States, and other parts of the world. The deterioration in the global economy has caused, and may continue to cause, a decrease in worldwide demand for 4
certain goods shipped in containerized form. In addition, if Greece or another European Union member country were to default on its sovereign debt, the impact on the global economy could have a material adverse effect on our business. We anticipate that a significant number of port calls made by our containerships will continue to involve the loading or unloading of container cargoes in ports in the Asia Pacific region. In recent years, China has been one of the world’s fastest growing economies in terms of gross domestic product,
which has had a significant impact on shipping demand. However, if China’s growth in gross domestic product declines and other countries in the Asia Pacific region experience slowed or experience negative economic growth in the future, this may exacerbate the effect of the significant downturns in the
economies of the United States and the European Union, and thus, may negatively impact container shipping demand. For example, the possibility of sovereign debt defaults by European Union member countries, including Greece, and the possibility of market reforms to float the Chinese renminbi,
either of which development could weaken the Euro against the Chinese renminbi, could adversely affect consumer demand in the European Union. Moreover, the revaluation of the renminbi may negatively impact the United States’ demand for imported goods, many of which are shipped from China in
containerized form. Such weak economic conditions could have a material adverse effect on our business, results of operations and financial condition and our ability to pay dividends to our stockholders. Disruptions in world financial markets and the resulting governmental action in the United States and in other parts of the world could have a material adverse impact on our results of operations, financial condition and cash flows. Global financial markets and economic conditions have been severely disrupted and volatile in recent years and remain subject to significant vulnerabilities, such as the deterioration of fiscal balances and the rapid accumulation of public debt, continued deleveraging in the banking sector and a limited
supply of credit. Credit markets as well as the debt and equity capital markets were exceedingly distressed during 2008 and 2009 and have been extremely volatile in recent months. The current sovereign debt crisis in countries such as Greece, for example, and concerns over debt levels of certain other
European Union member states and in other countries around the world, as well as concerns about international banks, have led to increased volatility in global credit and equity markets. These issues, along with the re-pricing of credit risk and the difficulties currently experienced by financial institutions
have made, and will likely continue to make, it difficult to obtain financing. As a result of the disruptions in the credit markets, many lenders have increased margins on lending rates, enacted tighter lending standards, required more restrictive terms (including higher collateral ratios for advances, shorter
maturities and smaller loan amounts), or have refused to refinance existing debt at all. Furthermore, certain banks that have historically been significant lenders to the shipping industry have reduced or ceased lending activities in the shipping industry. New banking regulations, including larger capital
requirements and the resulting policies adopted by lenders, could further reduce lending activities. We may experience difficulties obtaining financing commitments or be unable to fully draw on the capacity under our committed term loans in the future if our lenders are unwilling to extend financing to us
or unable to meet their funding obligations due to their own liquidity, capital or solvency issues. We cannot be certain that financing will be available on acceptable terms or at all. If financing is not available when needed, or is available only on unfavorable terms, we may be unable to meet our future
obligations as they come due. Our failure to obtain such funds could have a material adverse effect on our business, results of operations and financial condition, as well as our cash flows, including cash available for dividends to our shareholders. In the absence of available financing, we also may be
unable to take advantage of business opportunities or respond to competitive pressures. In addition, as a result of the ongoing economic turmoil in Greece resulting from the sovereign debt crisis and the related austerity measures implemented by the Greek government, we face the risk that strikes, work stoppages, civil unrest and violence within Greece may disrupt our shoreside
operations and those of our managers located in Greece. 5
We are dependent on our charterers fulfilling their obligations under agreements with us, and their inability or unwillingness to honor these obligations could significantly reduce our revenues and cash flow. We expect that our containerships will continue to be chartered to customers mainly under multi-year fixed rate time charters. Payments to us under these time charters are and will be our sole source of operating cash flow. Many of our charterers finance their activities through cash from operations,
the incurrence of debt or the issuance of equity. Since 2008, there has been a significant decline in the credit markets and the availability of credit, and the equity markets have been volatile. The combination of a reduction of cash flow resulting from declines in world trade, a reduction in borrowing
bases under reserve-based credit facilities and the lack of availability of debt or equity financing may result in a significant reduction in the ability of our charterers to make charter payments to us. Additionally, we could lose a time charter if the charterer exercises certain specified, limited termination
rights. If we lose a time charter because the charterer is unable to pay us or for any other reason, we may be unable to re-deploy the related vessel on similarly favorable terms or at all. Also, we will not receive any revenues from such a vessel while it is un-chartered, but we will be required to pay
expenses necessary to maintain and insure the vessel and service any indebtedness on it. The combination of any surplus of containership capacity and the expected increase in the size of the world containership fleet over the next few years may make it difficult to secure substitute employment for any of
our containerships if our counterparties fail to perform their obligations under the currently arranged time charters, and any new charter arrangements we are able to secure may be at lower rates. Furthermore, the surplus of containerships available at lower charter rates and lack of demand for our
customers’ liner services could negatively affect our charterers’ willingness to perform their obligations under our time charters, which in many cases provide for charter rates significantly above current market rates. While we have agreed in certain cases to charter rate re-arrangements entailing reductions
for specified periods, we have been compensated for these adjustments by, among other things, subsequent rate increases, so that the aggregate payments under the charters are not materially reduced, and in some cases we also have arranged for term extensions. However, there is no assurance that any
future charter re-arrangements will be on similarly favorable terms. The loss of any of our charterers, time charters or vessels, or a decline in payments under our time charters, could have a material adverse effect on our business, results of operations and financial condition, revenues and cash flow and our ability to pay dividends to our stockholders. A limited number of customers operating in a consolidating industry comprise a large part of our revenues. The loss of these customers could adversely affect our results of operations, cash flows and competitive position. Our customers in the containership sector consist of a limited number of liner companies. A.P. Moller-Maersk, MSC and COSCO together represented 74%, 75% and 68% of our revenue in 2009, 2010 and 2011, respectively. We expect that a limited number of leading liner companies will continue
to generate a substantial portion of our revenues. The cessation of business with these liner companies or their failure to fulfill their obligations under the time charters for our containerships could have a material adverse effect on our financial condition and results of operations, as well as our cash flows.
In addition, any consolidations involving our customers could increase the concentration of our business. A decrease in the level of China’s export of goods or an increase in trade protectionism could have a material adverse impact on our charterers’ business and, in turn, could cause a material adverse impact on our results of operations, financial condition and cash flows. China exports considerably more goods than it imports. Our containerships are deployed on routes involving containerized trade in and out of emerging markets, and our charterers’ container shipping and business revenue may be derived from the shipment of goods from the Asia Pacific region to
various overseas export markets including the United States and Europe. Any reduction in 6
or hindrance to the output of China-based exporters could have a material adverse effect on the growth rate of China’s exports and on our charterers’ business. For instance, the government of China has recently implemented economic policies aimed at increasing domestic consumption of Chinese-made
goods. This may have the effect of reducing the supply of goods available for export and may, in turn, result in a decrease of demand for container shipping. Additionally, though in China there is an increasing level of autonomy and a gradual shift in emphasis to a “market economy” and enterprise
reform, many of the reforms, particularly some limited price reforms that result in the prices for certain commodities being principally determined by market forces, are unprecedented or experimental and may be subject to revision, change or abolition. The level of imports to and exports from China
could be adversely affected by changes to these economic reforms by the Chinese government, as well as by changes in political, economic and social conditions or other relevant policies of the Chinese government. Our operations expose us to the risk that increased trade protectionism will adversely affect our business. If the incipient global recovery is undermined by downside risks and the recent economic downturn is prolonged, governments may turn to trade barriers to protect their domestic industries
against foreign imports, thereby depressing the demand for shipping. Specifically, increasing trade protectionism in the markets that our charterers serve has caused and may continue to cause an increase in (i) the cost of goods exported from China, (ii) the length of time required to deliver goods from
China and (iii) the risks associated with exporting goods from China, as well as a decrease in the quantity of goods to be shipped. Any increased trade barriers or restrictions on trade, especially trade with China, would have an adverse impact on our charterers’ business, operating results and financial condition and could thereby affect their ability to make timely charter hire payments to us and to renew and increase the number
of their time charters with us. This could have a material adverse effect on our business, results of operations and financial condition and our ability to pay dividends to our stockholders. We conduct a substantial amount of business in China, including through one of our local managers, Shanghai Costamare, a Chinese corporation, and our time charters with COSCO. The legal system in China is not fully developed and has inherent uncertainties that could limit the legal protections
available to us. The Chinese legal system is based on written statutes and their legal interpretation by the Standing Committee of the National People’s Congress. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, the Chinese government has been developing a
comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, because these laws and regulations are
relatively new, and because of the limited volume of published cases and their non-binding nature, interpretation and enforcement of these laws and regulations involve uncertainties. We do a substantial amount of business in China, including through one of our managers, Shanghai Costamare, a Chinese
corporation which, as of February 15, 2012, operated nine vessels under the Hong Kong flag and one vessel under the Liberian flag that were exclusively manned by Chinese crews, which exposes us to potential litigation in China. Additionally, we have charters with COSCO, a Chinese corporation, and
though these charters are governed by English law, we may have difficulties enforcing a judgment rendered by an English court (or other non-Chinese court) in China. Our ability to obtain additional debt financing for future acquisitions of vessels may be dependent on the performance of our then existing charters and the creditworthiness of our charterers. We intend to borrow against unencumbered containerships in our existing fleet and vessels we may acquire in the future as part of our growth plan. The actual or perceived credit quality of our charterers, and any defaults by them, may materially affect our ability to obtain the additional capital
resources that we will require to purchase additional vessels or may significantly increase our costs of obtaining such capital. Our inability to obtain additional financing or committing to 7
financing on unattractive terms could have a material adverse effect on our business, results of operations and financial condition and our ability to pay dividends to our stockholders. Our ability to pay dividends may be limited by the amount of cash we generate from operations following the payment of fees and expenses, by the establishment of any reserves, by restrictions in our debt instruments and by additional factors unrelated to our profitability. We intend to pay regular quarterly dividends. The declaration and payment of dividends is, however, subject to the discretion of our board of directors and the requirements of Marshall Islands law. The timing and amount of any dividends declared will depend on, among other things (a) our
earnings, financial condition, cash flow and cash requirements, (b) our liquidity, including our ability to obtain debt and equity financing on acceptable terms as contemplated by our vessel acquisition strategy, (c) restrictive covenants in our existing and future debt instruments and (d) provisions of
Marshall Islands law governing the payment of dividends. The international containership industry is highly volatile, and we cannot predict with certainty the amount of cash, if any, that will be available for distribution as dividends in any period. Also, there may be a high degree of variability from period to period in the amount of cash, if any, that is
available for the payment of dividends. The amount of cash we generate from operations and the actual amount of cash we will have available for dividends will vary based upon, among other things:
•
the charter-hire payments we obtain from our charters as well as the rates obtained upon the expiration of our existing charters; • our fleet expansion strategy and associated uses of our cash and our financing requirements; • delays in the delivery of newbuild vessels and the beginning of payments under charters relating to those vessels; • the level of our operating costs, such as the costs of crews, lubricants and insurance; • the number of unscheduled off-hire days for our fleet and the timing of, and number of days required for, scheduled dry-docking of our containerships; • prevailing global and regional economic and political conditions; • changes in interest rates; • the effect of governmental regulations and maritime self-regulatory organization standards on the conduct of our business; • changes in the basis of taxation of our activities in various jurisdictions; • modification or revocation of our dividend policy by our board of directors; and • the amount of any cash reserves established by our board of directors. The amount of cash we generate from our operations may differ materially from our net income or loss for the period, which will be affected by non-cash items. We may incur other expenses or liabilities that could reduce or eliminate the cash available for distribution as dividends. In addition, our credit facilities and other financing agreements prohibit the payment of dividends, if an event of default has occurred and is continuing or would occur as a result of the payment of such dividends. For more information regarding our financing arrangements, please read “Item 5. Operating and Financial Review and Prospects”. In addition, Marshall Islands law generally prohibits the payment of dividends other than from surplus (retained earnings and the excess of consideration received for the sale of shares above the par value of the shares) or if there is no surplus, from the net profits for the current and prior fiscal year,
or while a company is insolvent or if it would be rendered insolvent by the payment of such a dividend. We may not have sufficient surplus or net profits in the future to pay dividends, and our subsidiaries may not have sufficient funds, surplus or net profits to make distributions to us. As a result of
these and other factors, we may pay dividends during periods when we record losses and 8
may not pay dividends during periods when we record net income. We can give no assurance that dividends will be paid in the future. We may have difficulty properly managing our growth through acquisitions of new or secondhand vessels and we may not realize expected benefits from these acquisitions, which may negatively impact our cash flows, liquidity and our ability to pay dividends to our stockholders. We intend to grow our business by ordering newbuild vessels and through selective acquisitions of high-quality secondhand vessels. Our future growth will primarily depend on:
•
the operations of the shipyards that build any newbuild vessels we may order; • locating and identifying suitable high-quality secondhand vessels; • obtaining required financing on acceptable terms; • consummating vessel acquisitions; • enlarging our customer base; • hiring additional shore-based employees and seafarers; and • managing joint ventures or significant acquisitions. In addition, any vessel acquisition may not be profitable at or after the time of acquisition and may not generate cash flows sufficient to justify the investment. Other risks associated with vessel acquisitions that may harm our business, financial condition and operating results include the risks that we
may:
•
fail to realize anticipated benefits, such as new customer relationships, cost-savings or cash flow enhancements; • be unable to hire, train or retain qualified shore and seafaring personnel to manage and operate our growing business and fleet; • decrease our liquidity by using a significant portion of available cash or borrowing capacity to finance acquisitions; • significantly increase our interest expense or financial leverage if we incur additional debt to finance acquisitions; • incur or assume unanticipated liabilities, losses or costs associated with any vessels or businesses acquired; or • incur other significant charges, such as impairment of goodwill or other intangible assets, asset devaluation or restructuring charges. Unlike newbuild vessels, secondhand vessels typically do not carry warranties as to their condition. While we generally inspect existing vessels prior to purchase, such an inspection would normally not provide us with as much knowledge of a vessel’s condition as we would possess if it had been built
for us and operated by us during its life. Repairs and maintenance costs for secondhand vessels are difficult to predict and may be substantially higher than for vessels we have operated since they were built. These costs could decrease our cash flows, liquidity and our ability to pay dividends to our
stockholders. Delay in the delivery of our newbuild vessels on order, or any future newbuild vessel orders, could adversely effect our earnings. The expected delivery dates under our current shipbuilding contracts for newbuild vessels, and any additional shipbuilding contracts we may enter into in the future, may be delayed for reasons not under our control, including, among other things:
•
quality or engineering programs; • changes in governmental regulations or maritime self-regulatory organization standards; • work stoppages or other labor disturbances at the shipyard; 9
• bankruptcy of or other financial crisis involving the shipyard; • financial instability of the lenders under our committed credit facilities, resulting in potential delay or inability to draw down on such facilities; • financial instability of the charterers under our agreed time charters for the newbuild vessels, resulting in potential delay or inability to charter the newbuild vessels; • a backlog of orders at the shipyard; • political, social or economic disturbances; • weather interference or a catastrophic event, such as a major earthquake or fire; • requests for changes to the original vessel specifications; • shortages of or delays in the receipt of necessary construction materials, such as steel; and • an inability to obtain requisite permits or approvals. If the seller of any newbuild vessel we have contracted to purchase is not able to deliver the vessel to us as agreed, or if we cancel a purchase agreement because a seller has not met his obligations, it may result in a material adverse effect on our business, results of operations and financial condition
and our ability to pay dividends to our stockholders. Rising crew and other vessel operating costs may adversely affect our profits. Acquiring and renewing long-term time charters with leading liner companies depends on a number of factors, including our ability to man our containerships with suitably experienced, high-quality masters, officers and crews. In recent years, the limited supply of and increased demand for well-
qualified crew, due to the increase in the size of the global shipping fleet, has created upward pressure on crewing costs, which we generally bear under our time charters. Increases in crew costs and other vessel operating costs such as insurance, repairs and maintenance, and lubricants may adversely
affect our profitability. In addition, if we cannot retain sufficient numbers of quality on-board seafaring personnel, our fleet utilization will decrease, which could have a material adverse effect on our business, results of operations and financial condition and our ability to pay dividends to our stockholders. Rising fuel prices may have an adverse affect on our profits. The cost of fuel is a significant factor in negotiating charter rates and can affect us in both direct and indirect ways. This cost will be borne by us when our containerships are employed on voyage charters or contracts of affreightment. We currently have no voyage charters or contracts of
affreightment, but we may enter into such arrangements in the future, and to the extent we do so, an increase in the price of fuel beyond our expectations may adversely affect our profitability. Even where the cost of fuel is borne by the charterer, which is the case with all of our existing time charters,
that cost will affect the level of charter rates that charterers are prepared to pay. The price and supply of fuel is unpredictable and fluctuates based on events outside our control, including geo-political developments, supply and demand for oil, actions by members of the OPEC and other oil and gas producers, economic or other sanctions levied against oil and gas producing
countries, war and unrest in oil producing countries and regions, regional production patterns and environmental concerns and regulations. We must make substantial capital expenditures to maintain the operating capacity of our fleet and acquire vessels, which may reduce or eliminate the amount of cash for dividends to our stockholders. We must make substantial capital expenditures to maintain the operating capacity of our fleet and we generally expect to finance these maintenance capital expenditures with cash balances or credit facilities. In addition, we will need to make substantial capital expenditures to acquire vessels in
accordance with our growth strategy. Expenditures could increase as a result of, among other things, the cost of labor and materials, customer requirements and governmental regulations and 10
maritime self-regulatory organization standards relating to safety, security or the environment. Significant capital expenditures, including to maintain the operating capacity of our fleet, may reduce or eliminate the amount of cash available for distribution to our stockholders. The aging of our fleet may result in increased operating costs in the future, which could adversely affect our earnings. In general, the cost of maintaining a vessel in good operating condition increases with the age of the vessel. As our fleet ages, we will incur increased costs. Older vessels may require longer and more expensive dry-dockings, resulting in more off-hire days and reduced revenue. Older vessels are
typically less fuel efficient and more costly to maintain than more recently constructed vessels due to improvements in engine technology. In addition, older vessels are often less desirable to charterers. Governmental regulations and safety or other equipment standards related to the age of a vessel may
also require expenditures for alterations or the addition of new equipment to our vessels and may restrict the type of activities in which our containerships may engage. Our current fleet of 57 containerships, including 10 newbuild vessels on order, as of February 15, 2012 had an average age (weighted by
TEU capacity) of 9.3 years and included one containership over 30 years old. See “Item 4. Information on the Company—Business Overview—Our Fleet and Newbuild Vessels”. We cannot assure you that, as our vessels age, market conditions will justify such expenditures or will enable us to profitably
operate our older vessels. Unless we set aside reserves or are able to borrow funds for vessel replacement, at the end of the useful lives of our vessels our revenue will decline, which would adversely affect our business, results of operations and financial condition. Our current fleet of 57 containerships, including 10 newbuild vessels on order, as of February 15, 2012, had an average age (weighted by TEU capacity) of 9.3 years and included one containership over 30 years old. See “Item 4. Information on the Company—Business Overview—Our Fleet and Newbuild
Vessels”. Unless we maintain reserves or are able to borrow or raise funds for vessel replacement we will be unable to replace the older vessels in our fleet. Our cash flows and income are dependent on the revenues earned by the chartering of our containerships. The inability to replace the vessels in
our fleet upon the expiration of their useful lives could have a material adverse effect on our business, results of operations and financial condition and our ability to pay dividends to our stockholders. Any reserves set aside for vessel replacement will not be available for dividends. Containership values decreased significantly in 2008 and 2009 and have remained at depressed levels through 2011. Containership values may decrease further and over time may fluctuate substantially. If these values are low at a time when we are attempting to dispose of a vessel, we could incur a
loss. Containership values can fluctuate substantially over time due to a number of different factors, including:
•
prevailing economic conditions in the markets in which containerships operate; • reduced demand for containerships, including as a result of a substantial or extended decline in world trade; • increases in the supply of containership capacity; • prevailing charter rates; and • the cost of retrofitting or modifying existing ships to respond to technological advances in vessel design or equipment, changes in applicable environmental or other regulations or standards, or otherwise. If the market values of our vessels further deteriorate, we may be required to record an impairment charge in our financial statements, which could adversely affect our results of operations. In addition, any such deterioration in the market values of our vessels could trigger a breach under 11
our credit facilities, which could adversely affect our operations. If a charter expires or is terminated, we may be unable to re-charter the vessel at an acceptable rate and, rather than continue to incur costs to maintain the vessel, may seek to dispose of it. Our inability to dispose of the containership at a
reasonable price could result in a loss on its sale and adversely affect our results of operations and financial condition. Our growth depends on our ability to expand relationships with existing charterers and to obtain new time charters, for which we will face substantial competition from new entrants and established companies with significant resources. One of our principal objectives is to acquire additional containerships in conjunction with entering into additional multi-year time charters for these vessels. The process of obtaining new multi-year time charters is highly competitive and generally involves an intensive screening process and
competitive bids, and often extends for several months. Generally, we compete for charters based upon charter rate, customer relationships, operating expertise, professional reputation and containership specifications, including size, age and condition. In addition, as vessels age, it can be more difficult to employ them on profitable time charters, particularly during periods of decreased demand in the charter market. Accordingly, we may find it difficult to continue to find profitable employment for our older vessels, including the one vessel in our
fleet over 30 years of age as of February 15, 2012. We face substantial competition from a number of experienced companies, including state-sponsored entities. Some of these competitors have significantly greater financial resources than we do, and can therefore operate larger fleets and may be able to offer better charter rates. In the future, we may
also face competition from reputable, experienced and well-capitalized marine transportation companies that do not currently own containerships, but may choose to do so. Any increased competition may cause greater price competition for time charters, as well as for the acquisition of high-quality
secondhand vessels and newbuild vessels. Further, since the charter rate is generally considered to be one of the principal factors in a charterer’s decision to charter a vessel, the rates offered by our competitors can place downward pressure on rates throughout the charter market. As a result of these
factors, we may be unable to re-charter our containerships, expand our relationships with existing customers or to obtain new customers on a profitable basis, if at all, which could have a material adverse effect on our business, results of operations and financial condition and our ability to pay dividends
to our stockholders. Due to our lack of diversification, adverse developments in the containership transportation business could reduce our ability to service our debt obligations and pay dividends to our stockholders. We rely exclusively on the cash flow generated from charters for our containerships. Due to our lack of diversification, an adverse development in the container shipping industry would have a significantly greater impact on our financial condition and results of operations than if we maintained more
diverse assets or lines of business. An adverse development could also impair our ability to service debt or pay dividends to our stockholders. We may have more difficulty entering into multi-year, fixed-rate time charters if a more active short-term or spot container shipping market develops. One of our principal strategies is to enter into multi-year, fixed-rate time charters in both strong and weak charter rate environments, although in weaker charter rate environments we would generally expect to target somewhat shorter charter terms. If more containerships become available for the
spot or short-term charter market, we may have difficulty entering into additional multi-year, fixed-rate time charters for our containerships due to the increased supply of containerships and the possibility of lower rates in the spot market. As a result, we will then have to charter more of our
containerships for shorter periods and our revenues, cash flows and profitability could then reflect, to some degree, fluctuations in the short-term charter market. 12
We may be unable to recharter our vessels at profitable rates, if at all, upon their time charter expiry. As of February 15, 2012, the current time charters for 12 of our 47 containerships in the water will reach their maturities before the end of 2012. While we generally expect to be able to obtain time charters for our vessels within a reasonable period prior to their time charter expiry, we cannot be
assured that this will occur in any particular case, or at all. In addition, demand for containerships has been weakening, and we may be unable to secure rechartering rates that are as profitable as the current time charters. If we are unable to obtain new time charters for these containerships at favorable
rates it could have a material adverse effect on our business, results of operations and financial condition and our ability to pay dividends to our stockholders. We are a holding company and we depend on the ability of our subsidiaries to distribute funds to us in order to satisfy our financial obligations and to make dividend payments. We are a holding company and our subsidiaries conduct all of our operations and own all of our operating assets. We have no significant assets other than the equity interests in our subsidiaries. As a result, our ability to pay our obligations and to make dividend payments depends entirely on our
subsidiaries and their ability to distribute funds to us. The ability of a subsidiary to make these distributions could be affected by a claim or other action by a third party, including a creditor, or by the law of their respective jurisdictions of incorporation which regulates the payment of dividends. If we are
unable to obtain funds from our subsidiaries, our board of directors may exercise its discretion not to declare or pay dividends. We may be unable to draw down the full amount of our committed credit facilities if the market value of our vessels declines. As of February 15, 2012, we had $132.2 million of undrawn borrowing capacity comprised of $113.7 million under a loan facility concluded on October 6, 2011 and $18.5 million under a term facility we concluded on November 19, 2010. Our undrawn borrowing capacity excludes up to $647.0 million
available borrowing capacity under four credit facilities concluded during 2011, as all funds borrowed under these facilities are committed to finance part of the pre-delivery and delivery installments of the construction of our ten newbuild vessels on order. If the market value of our fleet declines, we may
default under our credit facilities, in which case we may not be able to draw down the full amount available to us, obtain additional financing, refinance our debt, or incur debt on terms that are acceptable to us. Our credit facilities or other financing arrangements contain payment obligations and restrictive covenants that may limit our liquidity and our ability to expand our fleet. A failure by us to meet our obligations under our credit facilities could result in an event of default under such credit facilities
and foreclosure on our vessels. Our credit facilities impose certain operating and financial restrictions on us. These restrictions in our existing credit facilities generally limit Costamare Inc., and our subsidiaries’ ability to, among other things:
•
pay dividends if an event of default has occurred and is continuing or would occur as a result of the payment of such dividends; • purchase or otherwise acquire for value any shares of our subsidiaries’ capital; • make or repay loans or advances, other than repayment of the credit facilities; • make investments in other persons; • sell or transfer significant assets, including any vessel or vessels mortgaged under the credit facilities, to any person, including Costamare Inc. and our subsidiaries; • create liens on assets; or 13
• allow the Konstantakopoulos family’s direct or indirect holding in Costamare Inc. to fall below 40% of the total issued share capital. Our existing credit facilities also require Costamare Inc. and certain of our subsidiaries to maintain specified loan to value ratios as summarized below:
•
under the credit facilities to which Costamare Inc. is the borrower, Costamare Inc. may not allow the aggregate of (a) the aggregate market value, primarily on a charter inclusive basis, of the mortgaged vessels under this facility and (b) the market value of any additional security provided to the
lender to fall below 125% of the aggregate of the loan amount and the swap exposure; or • under certain of our credit facilities, we may not allow the aggregate of (a) the aggregate market value, primarily on an inclusive charter basis, of the mortgaged vessel or vessels, and (b) the market value of any additional security provided to the lender to fall below a percentage ranging between
110% to 125% of the then outstanding amount of the credit facility and any related swap exposure. Costamare Inc. is required to maintain compliance with the following financial covenants:
•
the ratio of our total liabilities (after deducting all cash and cash equivalents) to market value adjusted total assets (after deducting all cash and cash equivalents) may not exceed 0.75:1; • the ratio of EBITDA over net interest expense must be equal to or higher than 2.5:1; • the aggregate amount of all cash and cash equivalents may not be less than the greater of (i) $30 million or (ii) 3% of the total debt, provided, however, that under two of our credit facilities, a minimum cash amount equal to 3% of the loan outstanding must be maintained in accounts with the
lender; and • the market value adjusted net worth must at all times exceed $500 million. A failure to meet our payment and other obligations could lead to defaults under our credit facilities. Our lenders could then accelerate our indebtedness and foreclose on the vessels in our fleet securing those credit facilities, which could result in the acceleration of other indebtedness that we may
have at such time and the commencement of similar foreclosure proceedings by other lenders. The loss of these vessels would have a material adverse effect on our operating results and financial condition. For additional information see “Item 5. Operating and Financial Review and Prospects—B. Liquidity
and Capital Resources—Credit Facilities”. Substantial debt levels could limit our ability to obtain additional financing and pursue other business opportunities. As of December 31, 2011, we had outstanding indebtedness of $1.4 billion and we expect to incur additional indebtedness as we grow our fleet. This level of debt could have important consequences to us, including the following:
•
our ability to obtain additional financing for working capital, capital expenditures, acquisitions or other purposes may be impaired or such financing may be unavailable on favorable terms; • we may need to use a substantial portion of our cash from operations to make principal and interest payments on our debt, reducing the funds that would otherwise be available for operations, future business opportunities and dividends to our stockholders; • our debt level could make us more vulnerable than our competitors with less debt to competitive pressures or a downturn in our business or the economy generally; and • our debt level may limit our flexibility in responding to changing business and economic conditions. Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating income is not
sufficient to service our current or future indebtedness, we will be forced to take actions such as reducing or delaying our business activities, acquisitions, investments or capital 14
expenditures, selling assets, restructuring or refinancing our debt or seeking additional equity capital. We may not be able to effect any of these remedies on satisfactory terms, or at all. The derivative contracts we have entered into to hedge our exposure to fluctuations in interest rates could result in higher than market interest rates and reductions in our stockholders’ equity, as well as charges against our income. We have entered into interest rate swaps, in an aggregate notional amount of approximately $1.4 billion as of December 31, 2011, generally for purposes of managing our exposure to fluctuations in interest rates applicable to indebtedness under our credit facilities which were advanced at floating
rates based on LIBOR. We have also entered into certain currency hedges. There is no assurance that our derivative contracts will provide adequate protection against adverse changes in interest rates or currency exchange ratios or that our bank counterparties will be able to perform their obligations. While we monitor the credit risks associated with our bank counterparties, there can be no assurance that these counterparties would be able to meet their commitments under our derivative contracts. Our bank counterparties include financial institutions that are based in European Union countries
that have faced and continue to face severe financial stress due to the ongoing sovereign debt crisis. The potential for our bank counterparties to default on their obligations under our derivative contracts may be highest when we are most exposed to the fluctuations in interest and currency rates such
contracts are designed to hedge, and several or all of our bank counterparties may simultaneously be unable to perform their obligations due to the same events or occurrences in global financial markets. To the extent our existing interest rate swaps do not, and future derivative contracts may not, qualify for treatment as hedges for accounting purposes we would recognize fluctuations in the fair value of such contracts in our income statement. In addition, changes in the fair value of our derivative
contracts are recognized in “Accumulated Other Comprehensive Loss” on our balance sheet, and can affect compliance with the net worth covenant requirements in our credit facilities. Changes in the fair value of our derivative contracts that do not qualify for treatment as hedges for accounting and
financial reporting purposes affect, among other things, our net income, earnings per share and EBITDA coverage ratio. For additional information see “Item 5. Operating and Financial Review and Prospects”. Because we generate all of our revenues in United States dollars but incur a significant portion of our expenses in other currencies, exchange rate fluctuations could hurt our results of operations. We generate all of our revenues in United States dollars and for the year ended December 31, 2011, we incurred a substantial portion of our vessels’ operating expenses in currencies other than United States dollars. This difference could lead to fluctuations in net income due to changes in the value
of the United States dollar relative to other currencies, in particular the Euro. Expenses incurred in foreign currencies against which the United States dollar falls in value could increase, thereby decreasing our net income. While we have hedged some of this exposure, our U.S. dollar denominated results
of operations and financial condition and ability to pay dividends could suffer from adverse currency exchange rate movements. While we believe that we are adequately hedged against this exposure through 2012, future declines in the U.S. dollar versus the Euro could have a material effect on our
operating expenses and net income. Increased competition in technology and innovation could reduce our charter hire income and the value of our vessels. The charter rates and the value and operational life of a vessel are determined by a number of factors, including the vessel’s efficiency, operational flexibility and physical life. Efficiency includes speed and fuel economy. Flexibility includes the ability to enter harbors, utilize related docking facilities
and pass through canals and straits. Physical life is related to the original design and construction, maintenance and the impact of the stress of operations. If new containerships are built 15
that are more efficient or flexible or have longer physical lives than our vessels, competition from these more technologically advanced containerships could adversely affect the amount of charter-hire payments that we receive for our containerships once their current time charters expire and the resale
value of our containerships. This could adversely affect our ability to service our debt or pay dividends to our stockholders. We are subject to regulation and liability under environmental and operational safety laws that could require significant expenditures and affect our cash flows and net income. Our business and the operation of our vessels are materially affected by environmental regulation in the form of international, national, state and local laws, regulations, conventions, treaties and standards in force in international waters and the jurisdictions in which our containerships operate, as well
as in the country or countries of their registration, including those governing the management and disposal of hazardous substances and wastes, the cleanup of oil spills and other contamination, air emissions, water discharges and ballast water management. Because such conventions, laws and regulations
are often revised, it is difficult to predict the ultimate cost of compliance with such requirements or their impact on the resale value or useful lives of our containerships. Environmental requirements can also affect the resale value or useful lives of our vessels, require a reduction in cargo capacity, vessel modifications or operational changes or restrictions, lead to decreased availability of, or more costly insurance coverage for, environmental matters or result in the
denial of access to certain jurisdictional waters or ports. Under local, national and foreign laws, as well as international treaties and conventions, we could incur material liabilities, including cleanup obligations and claims for natural resource damages, personal injury and/or property damages in the event
that there is a release of petroleum or other hazardous materials from our vessels or otherwise in connection with our operations. Violations of, or liabilities under, environmental requirements can result in substantial penalties, fines and other sanctions, including criminal sanctions, and, in certain
instances, seizure or detention of our containerships. Events of this nature or additional environmental conventions, laws and regulations could have a material adverse effect on our financial condition, results of operations and ability to pay dividends to our stockholders. The operation of vessels is also affected by the requirements set forth in the International Safety Management Code (the “ISM Code”). The ISM Code requires vessel owners and managers to develop and maintain an extensive “Safety Management System” that includes the adoption of a safety and
environmental protection policy setting forth instructions and procedures for safe vessel operation and describing procedures for dealing with emergencies. Failure to comply with the ISM Code may subject us to increased liability, may decrease or suspend available insurance coverage for the affected
vessels, and may result in a denial of access to, or detention in, certain ports. Each of the containerships in our fleet and each of our three managers are ISM Code-certified. However, there can be no assurance that such certifications can be maintained indefinitely. Governmental regulation of the shipping industry, particularly in the areas of safety and environmental requirements, can be expected to become stricter in the future. In addition, we believe that the heightened environmental, quality and security concerns of insurance underwriters, regulators and
charterers will lead to additional requirements, including enhanced risk assessment and security requirements and greater inspection and safety requirements for vessels. In complying with new environmental laws and regulations and other requirements that may be adopted, we may have to incur
significant capital and operational expenditures to keep our containerships in compliance, or even to scrap or sell certain containerships altogether. For additional information see “Item 4. Information on the Company—Business Overview—Risk of Loss and Liability Insurance—Environmental and Other
Regulations”. 16
The smuggling of drugs or other contraband onto our vessels may lead to governmental claims against us. We expect that our vessels will call in ports in South America and other areas where smugglers attempt to hide drugs and other contraband on vessels, with or without the knowledge of crew members. To the extent our vessels are found with contraband, whether inside or attached to the hull of our
vessel and whether with or without the knowledge of any of our crew, we may face governmental or other regulatory claims or penalties which could have an adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends. Increased inspection procedures, tighter import and export controls and new security regulations could increase costs and cause disruption of our containership business. International container shipping is subject to security and customs inspection and related procedures in countries of origin, destination, and certain trans-shipment points. These inspection procedures can result in cargo seizure, delays in the loading, offloading, trans-shipment, or delivery of containers,
and the levying of customs duties, fines and other penalties against us. Since the events of September 11, 2001, United States authorities have substantially increased container inspections. Government investment in non-intrusive container scanning technology has grown and there is interest in electronic monitoring technology, including so-called “e-seals” and “smart”
containers, that would enable remote, centralized monitoring of containers during shipment to identify tampering with or opening of the containers, along with potentially measuring other characteristics such as temperature, air pressure, motion, chemicals, biological agents and radiation. Also, as a
response to the events of September 11, 2001, additional vessel security requirements have been imposed, including the installation of security alert and automatic identification systems on board vessels. It is unclear what additional changes, if any, to the existing inspection and security procedures may ultimately be proposed or implemented in the future, or how any such changes will affect the industry. It is possible that such changes could impose additional financial and legal obligations on us.
Furthermore, changes to inspection and security procedures could also impose additional costs and obligations on our customers and may, in certain cases, render the shipment of certain types of goods in containers uneconomical or impractical. Any such changes or developments could have a material
adverse effect on our business, results of operations and financial condition and our ability to pay dividends to our stockholders. The operation of our vessels is also affected by the requirements set forth in the International Ship and Port Facilities Security Code (the “ISPS Code”). The ISPS Code requires vessels to develop and maintain a ship security plan that provides security measures to address potential threats to the
security of ships or port facilities. Although each of our containerships is ISPS Code-certified, any failure to comply with the ISPS Code or maintain such certifications may subject us to increased liability and may result in denial of access to, or detention in, certain ports. Furthermore, compliance with the
ISPS Code requires us to incur certain costs. Although such costs have not been material to date, if new or more stringent regulations relating to the ISPS Code are adopted by the IMO and the flag states, these requirements could require significant additional capital expenditures or otherwise increase
the costs of our operations. Governments could requisition our vessels during a period of war or emergency, resulting in loss of earnings. A government of the jurisdiction where one or more of our containerships are registered could requisition for title or seize our containerships. Requisition for title occurs when a government takes control of a vessel and becomes its owner. Also, a government could requisition our containerships for
hire. Requisition for hire occurs when a government takes control of a ship and effectively becomes the charterer at dictated charter rates. Generally, requisitions occur during a period of war or emergency, although governments may elect to requisition vessels in other circumstances. Although we would
expect to be entitled to compensation in the event of a requisition of one or 17
more of our vessels, the amount and timing of payment, if any, would be uncertain. Government requisition of one or more of our containerships may cause us to breach covenants in certain of our credit facilities, and could have a material adverse effect on our business, results of operations and
financial condition and our ability to pay dividends to our stockholders. The global financial markets continue to experience economic instability resulting from terrorist attacks, regional armed conflicts and general political unrest. Terrorist attacks in certain parts of the world over the last decade, such as the attacks on the United States on September 11, 2001, and the continuing response of the United States and other countries to these attacks, as well as the threat of future terrorist attacks, continue to cause uncertainty and
volatility in the world financial markets and may affect our business, results of operations and financial condition. In addition, current conflicts in Afghanistan and general political unrest in certain African nations and the Middle East may lead to additional regional conflicts and acts of terrorism around
the world, which may contribute to further economic instability in the global financial markets. Political tension or conflicts in the Asia Pacific Region may also reduce the demand for our services. These uncertainties, as well as future hostilities or other political instability in regions where our vessels
trade, could also affect trade volumes and patterns and adversely affect our operations, our ability to obtain financing and otherwise have a material adverse effect on our financial condition, results of operations and ability to pay dividends to our stockholders. Acts of piracy on ocean-going vessels have recently increased in frequency, which could adversely affect our business. Acts of piracy have historically affected ocean-going vessels trading in certain regions of the world, such as the South China Sea and the Gulf of Aden off the coast of Somalia. Since late 2010, particularly in the Gulf of Aden, the frequency and violence level of piracy incidents against commercial
shipping vessels has further increased from the already high levels that have generally existed since 2008. Our vessels regularly travel through regions where pirates are active. We may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on our results
of operations, financial condition and ability to pay dividends. Crew costs, including those due to employing onboard security guards, could also increase in such circumstances. Risks inherent in the operation of ocean-going vessels could affect our business and reputation, which could adversely affect our expenses, net income and stock price. The operation of ocean-going vessels carries inherent risks. These risks include the possibility of:
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marine disaster; • environmental accidents; • grounding, fire, explosions and collisions; • cargo and property loss or damage; • business interruptions caused by mechanical failure, human error, war, terrorism, political action in various countries, or adverse weather conditions; and • work stoppages or other labor problems with crew members serving on our containerships, some of whom are unionized and covered by collective bargaining agreements. Such occurrences could result in death or injury to persons, loss of property or environmental damage, delays in the delivery of cargo, loss of revenues from or termination of charter contracts, governmental fines, penalties or restrictions on conducting business, higher insurance rates, and damage to
our reputation and customer relationships generally. Although we maintain hull and machinery and war risks insurance, as well as protection and indemnity insurance, which may cover certain risks of loss resulting from such occurrences, our insurance coverage may be subject to caps or not cover such
losses, and any of these circumstances or events could increase our costs or lower our revenues. The involvement of our vessels in an environmental disaster may harm our reputation as a safe and reliable vessel owner and operator. 18
On October 5, 2011, our vessel Rena ran aground on the Astrolabe Reef off New Zealand and sustained significant damage. The vessel was determined to be a constructive total loss for insurance purposes. The proceedings regarding the grounding are at an early stage. Accordingly, while we
anticipate that our insurance policies will cover most costs and losses associated with the incident, such insurance may not be sufficient to cover all risks, including potential civil and criminal liabilities. As a result, claims against us or our subsidiaries as a result of the grounding of the Rena could have a
material adverse effect on our business. Our insurance may be insufficient to cover losses that may occur to our property or result from our operations. The operation of any vessel includes risks such as mechanical failure, collision, fire, contact with floating objects, property loss, cargo loss or damage and business interruption due to political circumstances in foreign countries, hostilities and labor strikes. In addition, there is always an inherent
possibility of a marine disaster, including oil spills and other environmental mishaps. There are also liabilities arising from owning and operating vessels in international trade. We procure insurance for our fleet of containerships in relation to risks commonly insured against by vessel owners and operators.
Our current insurance includes (i) hull and machinery insurance covering damage to our and third-party vessels’ hulls and machinery from, among other things, collisions and contact with fixed and floating objects, (ii) war risks insurance covering losses associated with the outbreak or escalation of
hostilities and (iii) protection and indemnity insurance (which includes environmental damage) covering, among other things, third-party and crew liabilities such as expenses resulting from the injury or death of crew members, passengers and other third parties, the loss or damage to cargo, third-party
claims arising from collisions with other vessels, damage to other third-party property and pollution arising from oil or other substances. We can give no assurance that we are adequately insured against all risks or that our insurers will pay a particular claim. Even if our insurance coverage is adequate to cover our losses, we may not be able to obtain a timely replacement containership in the event of a loss of a containership. Under
the terms of our credit facilities, we are subject to restrictions on the use of any proceeds we may receive from claims under our insurance policies. Furthermore, in the future, we may not be able to obtain adequate insurance coverage at reasonable rates for our fleet. For example, more stringent
environmental regulations have led to increased costs for, and in the future may result in the lack of availability of, insurance against risks of environmental damage or pollution. We may also be subject to calls, or premiums, in amounts based not only on our own claim records but also the claim records
of all other members of the protection and indemnity associations through which we receive indemnity insurance coverage. There is no cap on our liability exposure for such calls or premiums payable to our protection and indemnity association; however, such calls or premiums have only been assessed by
the protection and indemnity association in which our vessels are currently entered in two of the last fifteen years, in each case, for amounts that were immaterial. Based on the limited size and frequency of the calls or premiums historically, we do not believe these amounts to be material. Our insurance
policies also contain deductibles, limitations and exclusions which, although we believe are standard in the shipping industry, may nevertheless increase our costs. A catastrophic oil spill or marine disaster could exceed our insurance coverage, which could harm our business, financial condition and
operating results and our ability to pay dividends to our stockholders. Any uninsured or underinsured loss could harm our business and financial condition. In addition, the insurance may be voidable by the insurers as a result of certain actions, such as vessels failing to maintain required certification. In addition, we do not carry loss of hire insurance. Loss of hire insurance covers the loss of revenue during extended vessel off-hire periods, such as those that occur during an unscheduled dry-docking due to damage to the vessel from accidents. Accordingly, any loss of a vessel or any extended
period of vessel off-hire, due to an accident or otherwise, could have a material adverse effect on our business, results of operations and financial condition and our ability to pay dividends to our stockholders. 19
Maritime claimants could arrest our vessels, which could interrupt our cash flows. Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against a vessel for unsatisfied debts, claims or damages, including, in some jurisdictions, for debts incurred by previous owners. In many jurisdictions, a maritime lien-
holder may enforce its lien by arresting a vessel. The arrest or attachment of one or more of our vessels, if such arrest or attachment is not timely discharged, could cause us to default on a charter, breach covenants in certain of our credit facilities, interrupt our cash flows and could require us to pay
large sums of money to have the arrest or attachment lifted. In addition, in some jurisdictions, such as South Africa, under the “sister ship” theory of liability, a claimant may arrest both the vessel that is subject to the claimant’s maritime lien and any “associated” vessel, which is any vessel owned or controlled by the same owner. Claimants could try to assert
“sister ship” liability against one containership in our fleet for claims relating to another of our containerships. Compliance with safety and other requirements imposed by classification societies may be very costly and may adversely affect our business. The hull and machinery of every commercial vessel must be classed by a classification society. The classification society certifies that the vessel has been built and maintained in accordance with the applicable rules and regulations of the classification society. Moreover, every vessel must comply with
any applicable international conventions and the regulations of the vessel’s flag state as verified by a classification society. Finally, each vessel must successfully undergo periodic surveys, including annual, intermediate and special surveys. If any vessel does not maintain its class, it will lose its insurance coverage and be unable to trade, and the vessel’s owner will be in breach of relevant covenants under its financing arrangements. Failure to maintain the class of one or more of our containerships could have a material adverse effect
on our financial condition and results of operations, as well as our cash flows. Our business depends upon certain members of our senior management who may not necessarily continue to work for us. Our future success depends to a significant extent upon our chairman and chief executive officer, Konstantinos Konstantakopoulos, certain members of our senior management and our managers. Mr. Konstantakopoulos has substantial experience in the container shipping industry and has worked with
us and our managers for many years. He, our managers and certain of our senior management team are crucial to the execution of our business strategies and to the growth and development of our business. If these individuals were no longer to be affiliated with us or our managers, or if we were to
otherwise cease to receive services from them, we may be unable to recruit other employees with equivalent talent and experience, which could have a material adverse effect on our financial condition and results of operations. Our arrangements with our chief executive officer restrict his ability to compete with us, and such restrictive covenants generally, may be unenforceable. Konstantinos Konstantakopoulos, our chairman and chief executive officer, has entered into a restrictive covenant agreement with us on October 19, 2010, which is governed by English law, and under which, except for in certain limited circumstances, he is precluded during the term of his service and
for six months thereafter from owning containerships and from acquiring or investing in a business that owns such vessels. English law generally does not favor the enforcement of such restrictions which are considered contrary to public policy and facially are void for being in restraint of trade. Our
ability to enforce these restrictions, should it ever become necessary, will depend upon us establishing that we have a legitimate proprietary interest that is appropriate to protect, and that the protection sought is no more than is reasonable, having regard to the interests of the parties and the public
interest. We cannot give any assurance that a court would enforce the restrictions as 20
written by way of an injunction or that we could necessarily establish a case for damages as a result of a violation of the restrictive covenants agreement. We depend on our managers to operate our business, and if our managers fail to satisfactorily perform their management services, our results of operations, financial condition and ability to pay dividends may be harmed. Pursuant to the group management agreement between Costamare Shipping and us (the “Group Management Agreement”) and the individual ship management agreements pertaining to each vessel, our managers and their affiliates may provide us with certain of our officers and will provide us with,
among other things, certain commercial, technical and administrative services. “See Item. 4 Information on the Company—Business Overview—Management of Our Fleet”. Our operational success will depend significantly upon our managers’ satisfactory performance of these services. Costamare Shipping, one
of our managers, also owns the Costamare trademarks, which consist of the name “COSTAMARE” and the Costamare logo, and has agreed to license each trademark to us on a royalty free basis for the life of the Group Management Agreement. If the Group Management Agreement were to be
terminated or if its terms were to be altered, our business could be adversely affected, as we may not be able to immediately replace such services, and even if replacement services were immediately available, the terms offered could be less favorable than the ones currently offered by our managers. Our ability to compete for and enter into new time charters and to expand our relationships with our existing charterers will depend largely on our relationship with our managers and their reputation and relationships in the shipping industry. If our managers suffer material damage to their reputation
or relationships, it may harm our ability to:
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renew existing time charters upon their expiration; • obtain new time charters; • successfully interact with shipyards; • obtain financing and other contractual arrangements with third parties on commercially acceptable terms (therefore potentially increasing operating expenditure for the fleet); • maintain satisfactory relationships with our charterers and suppliers; or • successfully execute our business strategies. If our ability to do any of the things described above is impaired, it could have a material adverse effect on our financial condition and results of operations, as well as our cash flows. Our managers are privately held companies and there is little or no publicly available information about them. The ability of our managers to continue providing services for our benefit will depend in part on their own financial strength. Circumstances beyond our control could impair our managers’ financial strength, and because they are privately held companies, information about their financial strength is
not publicly available. As a result, an investor in our stock might have little advance warning of problems affecting any of our managers, even though these problems could have a material adverse effect on us. As part of our reporting obligations as a public company, we will disclose information
regarding our managers that has a material impact on us to the extent that we become aware of such information. Our chairman and chief executive officer has affiliations with our managers which could create conflicts of interest between us and our managers. The Group Management Agreement is between us and Costamare Shipping, which is controlled by our chairman and chief executive officer, Konstantinos Konstantakopoulos. While we believe that the terms of the Group Management Agreement are consistent with normal commercial practice of the
industry, the agreement was not negotiated at arms-length by non-related parties. Accordingly, 21
the terms may be less favorable to the Company than if such terms were obtained from a non-related third party. Additionally, Konstantinos Konstantakopoulos directly or indirectly controls our managers and will continue to be our chairman and chief executive officer and the owner of approximately
26.0% of our common stock, and this relationship could create conflicts of interest between us, on the one hand, and our managers, on the other hand. These conflicts, which are addressed in the Group Management Agreement and the restrictive covenant agreement between us and our chairman and
chief executive officer, may arise in connection with the chartering, purchase, sale and operation of the vessels in our fleet versus vessels owned or chartered-in by other companies affiliated with our managers or our chairman and chief executive officer. These conflicts of interest may have an adverse
effect on our results of operations. See “Item 4. Information of the Company—Business Overview—Management of Our Fleet” and “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Restrictive Covenant Agreements”. CIEL and Shanghai Costamare, two of our managers, are not prohibited from providing management services to vessels owned by third parties. CIEL and Shanghai Costamare, two of our managers, are not prohibited from providing management services to vessels owned by third parties, including related parties. CIEL and Shanghai Costamare have only provided services to third parties in a limited number of cases in the past and currently
only CIEL provides services to three third-party vessels. If either CIEL or Shanghai Costamare engages in this activity in the future, it could give rise to conflicts of interest or adversely affect the ability of these companies to provide the level of service that we require. Conflicts of interest with respect to
certain services, including sale and purchase and chartering activities, among others, may have an adverse effect on our results of operations. Our vessels may call on ports located in countries that are subject to restrictions imposed by the United States government, which could negatively affect the trading price of our shares of common stock. From time to time on charterers’ instructions, our vessels have called and may again call on ports located in countries subject to sanctions and embargoes imposed by the United States government and countries identified by the United States government as state sponsors of terrorism. The U.S.
sanctions and embargo laws and regulations vary in their application, as they do not all apply to the same covered persons or proscribe the same activities, and such sanctions and embargo laws and regulations may be amended or strengthened over time. In 2010, the U.S. enacted the Comprehensive Iran
Sanctions Accountability and Divestment Act (“CISADA”), which expanded the scope of the former Iran Sanctions Act. Among other things, CISADA expands the application of the prohibitions to non-U.S. companies, such as the Company, and introduces limits on the ability of companies and persons
to do business or trade with Iran when such activities relate to the investment, supply or export of refined petroleum or petroleum products. In addition, the U.S. Congress is currently considering the enactment of the Iran, North Korea, and Syria Nonproliferation Reform and Modernization Act of 2011,
which would, among other things, provide for the imposition of sanctions, including a prohibition on investments by U.S. persons and a 180-day prohibition on calling at any U.S. port, on companies or persons that provide certain shipping services to or from Iran, North Korea or Syria with respect to
certain prohibited goods. From January 2007 through December 2011, vessels in our fleet made a total of 148 calls to ports in Iran, Syria, Sudan and Cuba, representing approximately 0.67% of our approximately 23,500 calls on worldwide ports. Although we believe that we are in compliance with all applicable sanctions and
embargo laws and regulations, and intend to maintain such compliance, there can be no assurance that we will be in compliance in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations. Any such violation could result in fines or other penalties
and could result in some investors deciding, or being required, to divest their interest, or not to invest, in the Company. Additionally, some investors may decide to divest their interest, or not to invest, in the Company simply because we do business with companies that do business in sanctioned
countries. Moreover, our charterers may violate applicable sanctions and 22
embargo laws and regulations as a result of actions that do not involve us or our vessels, and those violations could in turn negatively affect our reputation. Investor perception of the value of our common stock may also be adversely affected by the consequences of war, the effects of terrorism, civil
unrest and governmental actions in these and surrounding countries. We are a Marshall Islands corporation, and the Marshall Islands does not have a well developed body of corporate law or a bankruptcy act, and, as a result, stockholders may have fewer rights and protections under Marshall Islands law than under the laws of a jurisdiction in the United States. Our corporate affairs are governed by our articles of incorporation and bylaws and by the Marshall Islands Business Corporations Act (the “BCA”). The provisions of the BCA are similar to provisions of the corporation laws of a number of states in the United States. However, there have been few
judicial cases in the Marshall Islands interpreting the BCA. The rights and fiduciary responsibilities of directors under the laws of the Marshall Islands are not as clearly established as the rights and fiduciary responsibilities of directors under statutes or judicial precedent in existence in certain U.S.
jurisdictions. Stockholder rights may differ as well. While the BCA does specifically incorporate the non-statutory law, or judicial case law, of the State of Delaware and other states with substantially similar legislative provisions, our public stockholders may have more difficulty in protecting their interests
in the face of actions by the management, directors or controlling stockholders than would stockholders of a corporation incorporated in a U.S. jurisdiction. For more information with respect to how stockholder rights under Marshall Islands law compare with stockholder rights under Delaware law, please
read “Marshall Islands Company Considerations”. The Marshall Islands has no established bankruptcy act, and as a result, any bankruptcy action involving our company would have to be initiated outside the Marshall Islands, and our public stockholders may find it difficult or impossible to pursue their claims in such other jurisdictions. It may be difficult or impossible to enforce service of process and enforcement of judgments against us and our officers and directors. We are a Marshall Islands corporation and all of our subsidiaries are, and will likely be, incorporated in jurisdictions outside the United States. In addition, our executive offices are located outside of the United States in Athens, Greece. All of our directors and officers reside outside of the United
States, and all or a substantial portion of our assets and the assets of most of our officers and directors are, and will likely be, located outside of the United States. As a result, it may be difficult or impossible for U.S. investors to serve legal process within the United States upon us or any of these
persons or to enforce a judgment against us for civil liabilities in U.S. courts. In addition, you should not assume that courts in the countries in which we or our subsidiaries are incorporated or where our or our subsidiaries’ assets are located (1) would enforce judgments of U.S. courts obtained in actions
against us or our subsidiaries based upon the civil liability provisions of applicable U.S. Federal and state securities laws or (2) would enforce, in original actions, liabilities against us or our subsidiaries based on those laws. Please read “Enforceability of Civil Liabilities”. There is also substantial doubt that the courts of the Marshall Islands or Greece would enter judgments in original actions brought in those courts predicated on U.S. Federal or state securities laws. Risks Relating to our Common Stock The price of our common stock may be volatile. The price of our common stock may be volatile and may fluctuate due to various factors including:
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actual or anticipated fluctuations in quarterly and annual results;
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• fluctuations in the seaborne transportation industry, including fluctuations in the containership market; • mergers and strategic alliances in the shipping industry; • market conditions in the shipping industry; • changes in governmental regulations or maritime self-regulatory organization standards; • shortfalls in our operating results from levels forecasted by securities analysts; • our payment of dividends; • announcements concerning us or our competitors; • general economic conditions; • terrorist acts; • future sales of our stock or other securities; • investors’ perception of us and the containership transportation industry; • the general state of the securities market; and • other developments affecting us, our industry or our competitors. The containership sector of the shipping industry has been highly unpredictable and volatile. Securities markets worldwide are experiencing significant price and volume fluctuations. The market price for our common stock may also be volatile. This market volatility, as well as general economic,
market or political conditions, could reduce the market price of our common stock in spite of our operating performance. Consequently, you may not be able to sell our common stock at prices equal to or greater than those at which you pay or paid. Our management is required to devote substantial time to complying with public company regulations. As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) as well as rules subsequently adopted by the SEC and the New York Stock Exchange (“NYSE”), including the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010, have imposed various requirements on public companies, including changes in corporate governance practices. Our directors, management and other personnel will need to devote a substantial amount of time to comply with these requirements. Moreover, these rules and
regulations relating to public companies will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. Sarbanes-Oxley requires, among other things, that we maintain and periodically evaluate our internal control over financial reporting and disclosure controls and procedures. In particular, under Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in each of our annual reports on
Form 20-F a report containing our management’s assessment of the effectiveness of our internal control over financial reporting and a related attestation of our independent auditors. We have undertaken a comprehensive effort in preparation for compliance with Section 404, which includes the
documentation, testing and review of our internal controls under the direction of our management. While we did not identify any material weaknesses or significant deficiencies in our internal controls under the current assessment, we cannot be certain at this time that all our controls will be considered
effective in future assessments. Therefore, we can give no assurances that our internal control over financial reporting will satisfy the new regulatory requirements in the future. We are a “foreign private issuer” and “controlled company” under the NYSE rules, and as such we are entitled to exemption from certain NYSE corporate governance standards, and you may not have the same protections afforded to stockholders of companies that are subject to all of the NYSE
corporate governance requirements. We are a “foreign private issuer” under the securities laws of the United States and the rules of the NYSE. Under the securities laws of the United States, “foreign private issuers” are subject to 24
different disclosure requirements than U.S. domiciled registrants, as well as different financial reporting requirements. Under the NYSE rules, a “foreign private issuer” is subject to less stringent corporate governance requirements. Subject to certain exceptions, the rules of the NYSE permit a “foreign
private issuer” to follow its home country practice in lieu of the listing requirements of the NYSE. In addition, members of the Konstantakopoulos family continue to own, in the aggregate, a majority of our outstanding common stock. As a result, we are a “controlled company” within the meaning of the
NYSE corporate governance standards. Under the NYSE rules, a company of which more than 50% of the voting power is held by another company or group is a “controlled company” and may elect not to comply with certain NYSE corporate governance requirements, including (1) the requirement that
a majority of the board of directors consist of independent directors, (2) the requirement that the nominating committee be composed entirely of independent directors and have a written charter addressing the committee’s purpose and responsibilities, (3) the requirement that the compensation committee
be composed entirely of independent directors and have a written charter addressing the committee’s purpose and responsibilities and (4) the requirement of an annual performance evaluation of the nominating and corporate governance and compensation committees. As permitted by these exemptions, as
well as by our bylaws and the laws of the Marshall Islands, we currently have a board of directors with a majority of non-independent directors, an audit committee comprised solely of two independent directors and a combined corporate governance, nominating and compensation committee with one
non-independent director serving as a committee chairman. As a result, non-independent directors, including members of our management who also serve on our board of directors, may, among other things, fix the compensation of our management, make stock and option awards and resolve governance
issues regarding our company. Accordingly, in the future you may not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements. Future sales of our common stock could cause the market price of our common stock to decline. Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales could occur, may depress the market price for our common stock. These sales could also impair our ability to raise additional capital through the sale of our equity securities in the
future. Subject to the rules of the NYSE, in the future, we may issue additional shares of common stock, and other equity securities of equal or senior rank, without stockholder approval, in a number of circumstances. The issuance by us of additional shares of common stock or other equity securities of equal or senior rank would have the following effects:
our existing stockholders’ proportionate ownership interest in us will decrease; • the dividend amount payable per share on our common stock may be lower; • the relative voting strength of each previously outstanding share may be diminished; and • the market price of our common stock may decline. Our stockholders also may elect to sell large numbers of shares held by them from time to time. The number of shares of common stock available for sale in the public market will be limited by restrictions applicable under securities laws, and agreements that we and our executive officers, directors
and existing stockholders may enter into with the underwriters at the time of an offering. Subject to certain exceptions, these agreements generally restrict us and our executive officers, directors and existing stockholders from directly or indirectly offering, selling, pledging, hedging or otherwise disposing
of our equity securities or any security that is convertible into or exercisable or exchangeable for our equity securities and from engaging in certain other transactions relating to such securities for a period of 180 days after the date of an offering prospectus without the prior written consent of the
underwriter(s). 25
•
Members of the Konstantakopoulos family are our principal existing stockholders and will control the outcome of matters on which our stockholders are entitled to vote; their interests may be different from yours. Members of the Konstantakopoulos family own, directly or indirectly, approximately 77.9% of our outstanding common stock, in the aggregate. These stockholders will be able to control the outcome of matters on which our stockholders are entitled to vote, including the election of our entire board
of directors and other significant corporate actions. The interests of each of these stockholders may be different from yours. Anti-takeover provisions in our organizational documents could make it difficult for our stockholders to replace or remove our current board of directors or could have the effect of discouraging, delaying or preventing a merger or acquisition, which could adversely affect the market price of the shares
of our common stock. Several provisions of our articles of incorporation and bylaws could make it difficult for our stockholders to change the composition of our board of directors in any one year, preventing them from changing the composition of our management. In addition, the same provisions may discourage, delay
or prevent a merger or acquisition that stockholders may consider favorable. These provisions:
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authorize our board of directors to issue “blank check” preferred stock without stockholder approval; • provide for a classified board of directors with staggered, three-year terms; • prohibit cumulative voting in the election of directors; • authorize the removal of directors only for cause and only upon the affirmative vote of the holders of a majority of the outstanding stock entitled to vote for those directors; • prohibit stockholder action by written consent unless the written consent is signed by all stockholders entitled to vote on the action; and • establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings. We have adopted a stockholder rights plan pursuant to which our board of directors may cause the substantial dilution of the holdings of any person that attempts to acquire us without the approval of our board of directors. These anti-takeover provisions, including the provisions of our stockholder rights plan, could substantially impede the ability of public stockholders to benefit from a change in control and, as a result, may adversely affect the market price of our common stock and your ability to realize any potential
change of control premium. Tax Risks In addition to the following risk factors, you should read “Item 10. Additional Information—Tax Considerations—Marshall Islands Tax Considerations”, “Tax Considerations—Liberian Tax Considerations” and “Tax Considerations—United States Federal Income Tax Considerations” for a more complete
discussion of the material Marshall Islands, Liberian and U.S. Federal income tax consequences of owning and disposing of our common stock. We may have to pay tax on U.S.-source income, which would reduce our earnings. Under the United States Internal Revenue Code of 1986, as amended (the “Code”), the U.S. source gross transportation income of a ship-owning or chartering corporation, such as ourselves, is subject to a 4% U.S. Federal income tax without allowance for deduction, unless that corporation qualifies
for exemption from tax under Section 883 of the Code and the Treasury Regulations promulgated thereunder. U.S. source gross transportation income consists of 50% of the gross 26
shipping income that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States. We believe that we have qualified and currently intend to continue to qualify for this statutory tax exemption for the foreseeable future. However, no assurance can be given that this will be the case in the future. If we or our subsidiaries are not entitled to this exemption under Section 883 for any
taxable year, we or our subsidiaries would be subject for those years to a 4% U.S. Federal income tax on our U.S. source gross transportation income. The imposition of this taxation could have a negative effect on our business and would result in decreased earnings available for distribution to our
stockholders. Some of our time charters contain provisions pursuant to which charterers undertake to reimburse us for the 4% gross basis tax on our U.S. source gross transportation income. For a more detailed discussion, see “Tax Considerations—United States Federal Income Tax Considerations—Taxation
of Our Shipping Income”. If we were treated as a “passive foreign investment company”, certain adverse U.S. Federal income tax consequences could result to U.S. stockholders. A foreign corporation will be treated as a “passive foreign investment company”, or PFIC, for U.S. Federal income tax purposes if at least 75% of its gross income for any taxable year consists of certain types of “passive income”, or at least 50% of the average value of the corporation’s assets
produce or are held for the production of those types of “passive income”. For purposes of these tests, “passive income” includes dividends, interest, and gains from the sale or exchange of investment property and rents and royalties other than rents and royalties that are received from unrelated parties
in connection with the active conduct of a trade or business. For purposes of these tests, income derived from the performance of services does not constitute “passive income”. U.S. stockholders of a PFIC are subject to a disadvantageous U.S. Federal income tax regime with respect to the income derived
by the PFIC, the distributions they receive from the PFIC, and the gain, if any, they derive from the sale or other disposition of their shares in the PFIC. If we are treated as a PFIC for any taxable year, we will provide information to U.S. stockholders who request such information to enable them to
make certain elections to alleviate certain of the adverse U.S. Federal income tax consequences that would arise as a result of holding an interest in a PFIC. Based on our proposed method of operation, we do not believe that we will be a PFIC with respect to any taxable year. In this regard, we intend to treat the gross income we derive or are deemed to derive from our time chartering activities as services income, rather than rental income.
Accordingly, we believe that our income from our time chartering activities does not constitute “passive income”, and the assets that we own and operate in connection with the production of that income do not constitute passive assets. Our counsel, Cravath, Swaine & Moore LLP, is of the opinion that we
should not be a PFIC based on certain assumptions made by them as well as certain representations we made to them regarding the composition of our assets, the source of our income, and the nature of our operations. There is, however, no legal authority under the PFIC rules addressing our proposed method of operation. Accordingly, no assurance can be given that the U.S. Internal Revenue Service (the “IRS”) or a court of law will accept our position, and there is a risk that the IRS or a court of law could
determine that we are a PFIC. Moreover, no assurance can be given that we would not constitute a PFIC for any future taxable year if there were to be changes in the nature and extent of our operations. If the IRS were to find that we are or have been a PFIC for any taxable year, U.S. stockholders would face adverse tax consequences. Under the PFIC rules, unless those stockholders make certain elections available under the Code, such stockholders would be liable to pay U.S. Federal income tax
at the then prevailing income tax rates on ordinary income plus interest upon excess distributions and upon any gain from the disposition of our common stock, as if the excess distribution or gain had been recognized ratably over the stockholder’s holding period. Please read “Tax Considerations—United
States Federal Income Tax Considerations—Taxation of United States Holders—PFIC Status” for a more detailed discussion of the U.S. Federal income tax consequences to U.S. stockholders if we are treated as a PFIC. 27
The enactment of proposed legislation could affect whether dividends paid by us constitute qualified dividend income eligible for the preferential rate. Legislation was recently proposed in the United States Senate that would deny the preferential rate of U.S. Federal income tax currently imposed on qualified dividend income with respect to dividends received from a non-U.S. corporation, unless the non-U.S. corporation either is eligible for benefits
of a comprehensive income tax treaty with the United States or is created or organized under the laws of a foreign country which has a comprehensive income tax system. Because the Marshall Islands has not entered into a comprehensive income tax treaty with the United States and imposes only
limited taxes on corporations organized under its laws, it is unlikely that we could satisfy either of these requirements. Consequently, if this legislation were enacted in its current form the preferential rate of U.S. Federal income tax discussed in “Tax Considerations—United States Federal Income Tax
Considerations—Taxation of United States Holders—Distributions on Our Common Stock” may no longer be applicable to dividends received from us. As of the date of this annual report, it is not possible to predict with certainty whether or in what form the proposed legislation will be enacted. 28
ITEM 4. INFORMATION ON THE COMPANY A. History and Development of the Company Costamare Inc. was incorporated in the Republic of The Marshall Islands on April 21, 2008 under the Marshall Islands Business Corporations Act, for the purpose of completing a reorganization of 53 ship-owning companies then owned by our chief executive officer and other members of the
Konstantakopoulos family under a single corporate holding company. We are controlled by members of the Konstantakopoulos family, which has a long history of operating and investing in the international shipping industry, including a long history of vessel ownership. Captain Vasileios
Konstantakopoulos, the father of our chairman and chief executive officer, Konstantinos Konstantakopoulos, founded Costamare Shipping in 1975. We initially owned and operated drybulk carrier vessels, but in 1984 we became the first Greek owned company to enter the containership market and, since
1992, we have focused exclusively on containerships. After assuming management of our company in 1998, Konstantinos Konstantakopoulos has concentrated on building a large, modern and reliable containership fleet run and supported by highly-skilled, experienced and loyal personnel. He founded the
management companies CIEL and Shanghai Costamare in 2001 and 2005, respectively, and he founded the manning agency C-Man Maritime in 2006. Today, Konstantinos Konstantakopoulos remains focused on continuing to develop the scope and capabilities of our management companies and related
manning agency. Under Konstantinos Konstantakopoulos’s leadership, we have continued to foster a company culture focusing on excellent customer service, industry leadership and innovation. In November 2010, we completed an initial public offering of our common stock in the United States and our common stock began trading on the New York Stock Exchange on November 4, 2010 under the ticker symbol “CMRE”. We maintain our principal executive offices at 60 Zephyrou Street &
Syngrou Avenue 17564, Athens, Greece. Our telephone number at that address is +30-210-949-0050. Our registered address in the Marshall Islands is Trust Company Complex, Ajeltake Road, Ajeltake Island, Majuro, Marshall Islands MH96960. The name of our registered agent at such address is The Trust
Company of the Marshall Islands, Inc. B. Business Overview General We are an international owner of containerships, chartering our vessels to many of the world’s largest liner companies. As of February 15, 2012, we had a fleet of 57 containerships aggregating approximately 327,000 TEU, making us one of the largest public containership companies in the world,
based on total TEU capacity. At that date, our fleet consisted of (i) 47 vessels in the water, aggregating approximately 238,000 TEU and (ii) ten newbuild vessels aggregating approximately 89,000 TEU that are scheduled to be delivered to us between October 2012 and January 2014. See “—Our Fleet,
Acquisitions and Newbuild Vessels”. Our strategy is to time-charter our containerships to a geographically diverse, financially strong and loyal group of leading liner companies. Our containerships operate primarily under multi-year time charters and therefore are not subject to the effect of seasonal variations in demand. Our
containerships have a record of low unscheduled off-hire days, with fleet utilization levels of 99.9%, 99.7% and 99.3% in 2009, 2010 and 2011, respectively. Over the last three years our largest customers by revenue were A.P. Moller-Maersk, MSC and COSCO. As of February 15, 2012, the average
(weighted by TEU capacity) remaining time-charter duration for our fleet of 57 containerships was 5.7 years, based on the remaining fixed terms and assuming the exercise of any owner’s options and the non-exercise of any charterer’s options under our containerships’ charters. As of February 15, 2012,
our fixed-term charters represented an aggregate of $3.0 billion of contracted revenue, assuming the earliest redelivery dates possible and 365 revenue days per annum per containership. Our company operates through a number of wholly-owned vessel-owning subsidiaries incorporated in the Republic of Liberia. Each of our vessels is managed by at least one of our three managers: Costamare Shipping, CIEL and Shanghai Costamare, all of which are controlled by our 29
chairman and chief executive officer. We believe that having three management companies provides us with a deep pool of operational management in multiple locations with market-specific experience and relationships, as well as the geographic flexibility needed to manage and crew our large and
diverse fleet so as to provide a high level of service, while remaining cost-effective. Our Fleet, Acquisitions and Newbuild Vessels The tables below provide additional information, as of February 15, 2012, about our fleet of 57 containerships, including our contracted newbuild vessels. Each vessel is a cellular containership, meaning it is a dedicated container vessel.
Vessel Name
Charterer
Year
Capacity
Time
Current Daily
Expiration of
Average Daily 1
COSCO GUANGZHOU
COSCO
2006
9,469
12 years
36,400
December 2017
36,400 2
COSCO NINGBO
COSCO
2006
9,469
12 years
36,400
January 2018
36,400 3
COSCO YANTIAN
COSCO
2006
9,469
12 years
36,400
February 2018
36,400 4
COSCO BEIJING
COSCO
2006
9,469
12 years
36,400
April 2018
36,400 5
COSCO HELLAS
COSCO
2006
9,469
12 years
37,519
May 2018
37,519 6
HYUNDAI NAVARINO
HMM
2010
8,531
1.2 years
44,000
March 2012
44,000 7
MAERSK KAWASAKI(i)
A.P. Moller-Maersk
1997
7,403
10 years
37,000
December 2017
37,000 8
MAERSK KURE(i)
A.P. Moller-Maersk
1996
7,403
10 years
37,000
December 2017
37,000 9
MAERSK KOKURA(i)
A.P. Moller-Maersk
1997
7,403
10 years
37,000
February 2018
37,000 10
MSC METHONI
MSC
2003
6,724
10 years
29,000
September 2021
29,000 11
SEALAND NEW YORK
A.P. Moller-Maersk
2000
6,648
11 years
30,375
(3)
March 2018
27,670 12
MAERSK KOBE
A.P. Moller-Maersk
2000
6,648
11 years
38,179
(4)
May 2018
30,714 13
SEALAND WASHINGTON
A.P. Moller-Maersk
2000
6,648
11 years
30,375
(5)
June 2018
27,796 14
SEALAND MICHIGAN
A.P. Moller-Maersk
2000
6,648
11 years
25,375
(6)
August 2018
25,802 15
SEALAND ILLINOIS
A.P. Moller-Maersk
2000
6,648
11 years
30,375
(7)
October 2018
27,904 16
MAERSK KOLKATA
A.P. Moller-Maersk
2003
6,644
11 years
38,490
(8)
November 2019
32,354 17
MAERSK KINGSTON
A.P. Moller-Maersk
2003
6,644
11 years
38,461
(9)
February 2020
32,561 18
MAERSK KALAMATA
A.P. Moller-Maersk
2003
6,644
11 years
38,418
(10)
April 2020
32,625 19
MSC ROMANOS
MSC
2003
5,050
5.3 years
28,000
November 2016
28,000 20
ZIM NEW YORK
ZIM
2002
4,992
10 years
16,205
(11)
July 2012
63,663 21
ZIM SHANGHAI
ZIM
2002
4,992
10 years
16,205
(12)
August 2012
53,535 22
ZIM PIRAEUS(ii)
ZIM
2004
4,992
10 years
18,150
(13)
March 2014
27,123 23
OAKLAND EXPRESS
Hapag Lloyd
2000
4,890
8 years
30,500
September 2016
30,500 24
HALIFAX EXPRESS
Hapag Lloyd
2000
4,890
8 years
30,500
October 2016
30,500 25
SINGAPORE EXPRESS
Hapag Lloyd
2000
4,890
8 years
30,500
July 2016
30,500 26
MSC MANDRAKI
MSC
1988
4,828
7.8 years
20,000
August 2017
20,000 27
MSC MYKONOS
MSC
1988
4,828
8.2 years
20,000
September 2017
20,000 28
MSC ULSAN
MSC
2002
4,312
5.3 years
16,500
April 2017
16,500 29
MSC ANTWERP
MSC
1993
3,883
4.3 years
17,500
August 2013
17,500 30
MSC WASHINGTON
MSC
1984
3,876
3.2 years
17,250
February 2013
17,250 31
MSC KYOTO
MSC
1981
3,876
3.1 years
17,250
June 2013
17,250 32
MSC AUSTRIA
MSC
1984
3,584
9.5 years
17,250
(14)
September 2018
13,908 33
KARMEN
Sea Consortium
1991
3,351
1 year
19,400
April 2012
19,400 34
MARINA
PO Hainan
1992
3,351
1 year
18,000
March 2012
18,000 35
KONSTANTINA
Sea Consortium
1992
3,351
1 year
7,100
May 2012
7,100 36
AKRITAS
Hapag Lloyd
1987
3,152
4 years
12,500
August 2014
12,500 37
GIFTED(iii)
Evergreen
1984
2,922
5 years
15,200
November 2012
15,200 30
Built
(TEU)
Charter
Term(1)
Charter Hire
(U.S. dollars)
Charter(1)
Charter Rate
Until Earliest
Expiry of
Charter
(U.S. dollars)(2)
Vessel Name
Charterer
Year
Capacity
Time
Current Daily
Expiration of
Average Daily 38
GENIUS I(iii)
Evergreen
1984
2,922
3.3 years
15,200
November 2012
15,200 39
GATHER(iii)
Evergreen
1984
2,922
5 years
15,200
November 2012
15,200 40
MSC CHALLENGER
MSC
1986
2,633
4.8 years
10,000
July 2015
10,000 41
MSC REUNION
MSC
1992
2,024
6 years
12,000
(15)
June 2014
11,594 42
MSC NAMIBIA II
MSC
1991
2,023
6.8 years
11,500
July 2014
11,500 43
MSC SIERRA II
MSC
1991
2,023
5.7 years
11,250
(16)
June 2014
11,459 44
MSC PYLOS
MSC
1991
2,020
3 years
9,200
(17)
January 2014
11,458 45
PROSPER
TS Lines
1996
1,504
1 year
10,500
March 2012
10,500 46
ZAGORA
MSC
1995
1,162
0.7 years
7,000
March 2012
7,000 47
HORIZON
OACL
1991
1,068
7.1 years
10,050
April 2012
10,050 Vessels under Construction
Vessel
Name
Shipyard
Charterer
Expected Delivery
Approximate 1
Hull S4010
Sungdong Shipbuilding
MSC
4th Quarter 2012
9,000 2
Hull S4011
Sungdong Shipbuilding
MSC
4th Quarter 2012
9,000 3
Hull S4020
Sungdong Shipbuilding
Evergreen
1st Quarter 2013
8,800 4
Hull S4021
Sungdong Shipbuilding
Evergreen
1st Quarter 2013
8,800 5
Hull S4022
Sungdong Shipbuilding
Evergreen
2nd Quarter 2013
8,800 6
Hull S4023
Sungdong Shipbuilding
Evergreen
2nd Quarter 2013
8,800 7
Hull S4024
Sungdong Shipbuilding
Evergreen
3rd Quarter 2013
8,800 8
H1068A
Jiangnan Changxing
MSC
November 2013
9,000 9
H1069A
Jiangnan Changxing
MSC
December 2013
9,000 10
H1070A
Jiangnan Changxing
MSC
January 2014
9,000
(1)
Charter terms and expiration dates are based on the earliest date charters could expire. (2) This average rate is calculated based on contracted charter rates for the days remaining between February 15, 2012 and the earliest expiration of each charter. Certain of our charter rates change until their earliest expiration dates, as indicated in the footnotes below. (3) This charter rate changes on May 8, 2014 to $26,100 per day until the earliest redelivery date. (4) This charter rate changes on June 30, 2014 to $26,100 per day until the earliest redelivery date. (5) This charter rate changes on August 24, 2014 to $26,100 per day until the earliest redelivery date. (6) This charter rate changes on October 20, 2014 to $26,100 per day until the earliest redelivery date. (7) This charter rate changes on December 4, 2014 to $26,100 per day until the earliest redelivery date. (8) This charter rate changes on January 13, 2016 to $26,100 per day until the earliest redelivery date. (9) This charter rate changes on April 28, 2016 to $26,100 per day until the earliest redelivery date. (10) This charter rate changes on June 11, 2016 to $26,100 per day until the earliest redelivery date. (11) This charter rate changes on July 1, 2012 to $23,150 per day until the earliest redelivery date. In addition, if the charterer does not exercise its unilateral option to make a one-time payment 31
Built
(TEU)
Charter
Term(1)
Charter Hire
(U.S. dollars)
Charter(1)
Charter Rate
Until Earliest
Expiry of
Charter
(U.S. dollars)(2)
Capacity
(TEU)
at the earliest redelivery of the charter of approximately $6.9 million, the charter will be extended for a period of approximately 3 years at a minimum rate of $23,150. (12) This charter rate changes on July 1, 2012 to $23,150 per day until the earliest redelivery date. In addition, if the charterer does not exercise its unilateral option to make a one-time payment at the earliest redelivery of the charter of approximately $6.9 million, the charter will be extended for a
period of approximately 3 years at a minimum rate of $23,150. (13) This charter rate changes on May 8, 2012 to $18,274 per day and on January 1, 2013 to $22,150 per day until the earliest redelivery date. In addition, the charterer is required to pay approximately $5.0 million no later than July 2016, representing accrued charter hire, the payment of which was
deferred. (14) This charter rate changes on December 1, 2012 until redelivery, to a minimum of $13,500 per day plus 50% of the difference between the market rate and the hire rate of $13,500. Market rate to be determined annually based on the Hamburg ConTex type 3500 TEU index published on October 1 of
each year until redelivery. (15) This charter rate changes on July 27, 2012 to $11,500 per day until the earliest redelivery date. (16) This charter rate changes on July 1, 2012 to $11,500 per day until the earliest redelivery date. (17) This charter rate changes on February 28, 2012 to $11,500 per day until the earliest redelivery date.
(i)
The charterer has a unilateral option to extend the charter of the vessel for two periods of 30 months each +/-90 days on the final period performed, at a rate of $41,700 per day. (ii) The charterer has a unilateral option to extend the charter of the vessel for a period of 12 months +/-60 days at a rate of $27,500 per day. (iii) Each charterer has a unilateral option to extend the charter of the vessel for an additional period through 2014, at a rate of $14,000 per day. Chartering of Our Fleet We deploy our containership fleet principally under multi-year time charters with leading liner companies that operate on regularly scheduled routes between large commercial ports. As of February 15, 2012, the average (weighted by TEU capacity) remaining time-charter duration for our fleet of 57
containerships, including our contracted newbuild vessels, was 5.7 years, based on the remaining fixed terms and assuming the exercise of any owner’s options and the non-exercise of any charterer’s options under our containerships’ charters. A time charter is a contract to charter a vessel for a fixed period of time at a set daily rate and can last from a few days up to several years. Under our time charters the charterer pays for most voyage expenses, such as port, canal and fuel costs, agents’ fees, extra war risks insurance and any other
expenses related to the cargoes, and we pay for vessel operating expenses, which include, among other costs, costs for crewing, provisions, stores, lubricants, insurance, maintenance and repairs, dry-docking and intermediate and special surveys. Our Customers Since 2006, our customers have included over 10 of the leading international companies, including A.P. Moller-Maersk, COSCO, Evergreen Marine, Hapag Lloyd, HMM, MSC, OACL and ZIM. A.P. Moller-Maersk, MSC and COSCO together represented 74%, 75% and 68% of our revenue in 2009,
2010 and 2011, respectively. Management of Our Fleet Costamare Shipping provides us with general administrative services, certain commercial services, director and officer (“D&O”) related insurance services and the services of our executive officers pursuant to the Group Management Agreement between Costamare Shipping and us. Costamare Shipping,
itself or through Shanghai Costamare and CIEL, provides our fleet with 32
technical, crewing, commercial, provisions, bunkering, sale and purchase, chartering, accounting, insurance and administrative services pursuant to the Group Management Agreement and separate ship-management agreements between each of our containership-owning subsidiaries and Costamare Shipping,
and in respect of certain of our containerships, also CIEL. In return for these services, we pay the management fees described below in this section and elsewhere in this annual report. Our three managers control the selection and employment of seafarers for our containerships, directly through their
crewing offices in Athens, Greece and Shanghai, China, and indirectly through our related crewing agent in the Philippines, C-Man Maritime, and independent manning agents in Romania and Bulgaria. Under the Group Management Agreement, Costamare Shipping may subcontract certain of its
obligations, or direct that CIEL or Shanghai Costamare enter into a direct ship-management contract with the relevant containership owning subsidiary. As discussed below, these arrangements will not result in any increase in the aggregate amount of management fees we pay. We believe that having
three management companies provides us with a deep pool of operational management in multiple locations with market-specific experience and relationships, as well as the geographic flexibility needed to manage and crew our large and diverse fleet so as to provide a high level of service, while
remaining cost-effective. For example, Shanghai Costamare employs Chinese nationals with the language skills and local knowledge we believe are necessary to grow and establish meaningful relationships with Chinese shipyards, charterers, ship-owners, financial institutions and containership service
providers. All three managers are controlled by our chairman and chief executive officer. Our chairman and chief executive officer and our chief financial officer supervise, in conjunction with our board of directors, the services provided by Costamare Shipping, CIEL and Shanghai Costamare. Our managers
report to our board of directors through our chairman and chief executive officer and our chief financial officer, each of whom is appointed by our board of directors. Under the Group Management Agreement, the Company is responsible for the cost of the compensation and benefits for our executive
officers. We could request that Costamare Shipping provide the services of additional officers or employees pursuant to the Group Management Agreement, in which case we would be responsible for the cost of their compensation and benefits. Costamare Shipping, which was established in 1975, is a ship management company which was owned by Vasileios Konstantakopoulos until June 2010, at which point ownership was transferred to our chairman and chief executive officer. Costamare Shipping has 28 years of experience in managing
containerships of all sizes, developing specifications for newbuild vessels and supervising the construction of such newbuild vessels in reputable shipyards in the Far East. Costamare Shipping has long established relationships with major liner companies, financial institutions and suppliers and we believe is
recognized in the containership shipping industry as a leading containership manager. Costamare Shipping provides commercial services and insurance services to all our containerships. Costamare Shipping also provides, either directly or through Shanghai Costamare, technical, crewing, provisions,
bunkering, sale and purchase and accounting services to our containerships (other than certain containerships, for which CIEL provides these services, as described below). All of these services are provided by Costamare Shipping pursuant to separate ship-management agreements between Costamare
Shipping and each of our containership-owning subsidiaries. CIEL, which was established in February 2001, is a ship management company owned 50.2% by our chairman and chief executive officer, and 49.8% by Dimitrios Lemonidis, its chief executive officer. CIEL specializes, although not exclusively, in managing containerships of up to 3,500 TEU. As of
February 15, 2012, CIEL provided technical, crewing, provisions, bunkering, sale and purchase and accounting services, as well as certain commercial services, to 12 of our containerships that fly the Liberian and Maltese flags and full management services to Grand—a 1992-built 1,012 TEU containership
owned 60% by the family of Dimitrios Lemonidis and 40% by third parties, which is not part of our current fleet of containerships. CIEL also provides full management services to Cougar—a 1992-built, 1,308 TEU containership and to Jaguar—a 1996 built 1,122 TEU containership, both of which are wholly
owned by the family of Dimitrios Lemonidis. The management services performed by CIEL in respect of our Liberian and Maltese flagged containerships are provided in exchange for a fixed daily fee, pursuant to separate ship-management agreements signed between each relevant containership owning
subsidiary and CIEL. In the past, 33
CIEL has managed vessels flying a number of flags other than Liberia and Malta, including Hong Kong, Panama, the Bahamas and Gibraltar, and has provided management services to containerships owned by third parties, namely three containerships operated by MSC, two containerships operated by
A.P. Moller-Maersk and two containerships operated by MPC Munchmeyer Peterson Steamship GmbH & Co KG, an affiliate of a major German KG house, MPC Capital AG. Shanghai Costamare, which was established in February 2005, is owned (indirectly) 70% by our chairman and chief executive officer, and (indirectly) 30% by Zhang Lei, a Chinese national who is Shanghai Costamare’s chief executive officer. Shanghai Costamare was established to service the needs
of our fleet of containerships when operating in the Far East and South East Asia regions in an efficient and cost-effective manner by providing dedicated on-shore support and manning services in China, and a valuable interface with Chinese shipyards, charterers, ship-owners, financial institutions and
containership service providers. As of February 15, 2012, Shanghai Costamare provided technical, crewing, provisions, bunkering, sale and purchase and accounting services, as well as certain commercial services, to our nine containerships flying the Hong Kong flag and one containership flying the
Liberian flag. These containerships are exclusively manned by Chinese crews, which means that the Chinese on-shore personnel of Shanghai Costamare can communicate and provide integrated services and support to these containerships in the most efficient manner. Shanghai Costamare provides these
services for a fixed daily fee, pursuant to separate ship-management agreements between Costamare Shipping and Shanghai Costamare. As of February 15, 2012,
•
Costamare Shipping provided commercial and insurance services to all of our containerships as well as technical, crewing, provisions, bunkering, sale and purchase and accounting services to our 25 containerships flying the Greek flag; • CIEL provided technical, crewing, provisions, bunkering, sale and purchase and accounting services to 12 of our containerships flying the Liberian and Maltese flags; and • Shanghai Costamare provided technical, crewing, provisions, bunkering, sale and purchase and accounting services to nine containerships of our fleet flying the Hong Kong flag and one flying the Liberian flag. Our managers are well-regarded in the industry and have used innovative practices and technological advancement to maximize efficiency in the operation of our fleet of containerships. ISM certification is in place for our fleet of containerships and our three managers, with Costamare Shipping
obtaining such certification in 1998, three years ahead of the deadline set by the IMO. All three managers and our fleet of containerships are also certified in accordance with ISO 9001-2008 and ISO 14001-2004 relating to quality management and environmental standards. In 2004, Costamare Shipping
received the Lloyd’s List Greek shipping award for Dry Cargo Company of the Year. As of February 15, 2012, except for CIEL’s management of Cougar, Grand and Jaguar, our managers did not manage containerships other than those owned by us. Costamare Shipping has agreed that, during the term of the Group Management Agreement, it will not provide any management services to any other entity without our prior written approval. The Group Management Agreement does not prohibit CIEL or Shanghai Costamare from providing
services to third parties. In the past, CIEL and Shanghai Costamare have only provided services to third parties on a limited basis and there is no current plan to change that practice. Under the restrictive covenant agreement between the Company and Konstantinos Konstantakopoulos, during the period of his employment or service with the Company and for six months thereafter, he has agreed to restrictions on his ownership of any containerships or the acquisition, investment in
or control of any business involved in the ownership or operation of containerships, subject to certain exceptions. Konstantinos Konstantakopoulos has also agreed that if one of our containerships and a containership owned by him are both available and meet the criteria for an available charter, our
containerships will receive such charter. “See Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Restrictive Covenant Agreements”. 34
Costamare Shipping receives a fee of $850 per day ($425 per day in the case of a containership subject to a bareboat charter) for each containership, pro rated for the calendar days we own each containership, for providing us with general administrative services, certain commercial services, D&O
related insurance services and the services of our officers (but not for payment of such officer’s compensation or benefits) and for providing the relevant containership-owning subsidiaries with technical, commercial, insurance, accounting, provisions, sale and purchase, crewing and bunkering services. In the
event that Costamare Shipping decides to delegate certain or all of the services it has agreed to perform, either through subcontracting to CIEL or Shanghai Costamare or by directing CIEL or Shanghai Costamare to enter into a direct ship-management agreement with the relevant containership-owning
subsidiary, then, in the case of subcontracting, Costamare Shipping will be responsible for paying the management fee charged by the relevant sub-manager for providing such services and, in the case of a direct ship-management agreement, the fee received by Costamare Shipping will be reduced by the
fee payable to CIEL or, as the case may be, Shanghai Costamare, under the relevant direct ship-management agreement. As a result, these arrangements will not result in any increase in the aggregate management fees we pay. In addition to management fees, we pay for any capital expenditures, financial
costs, operating expenses and any general and administrative expenses, including the salaries of our officers and employees and payments to third parties, including specialist providers, in accordance with the Group Management Agreement and the relevant separate ship-management agreements or
supervision agreements. We also pay to Costamare Shipping a flat fee of $700,000 per newbuild vessel for the supervision of the construction of any newbuild vessel for which we may contract. Costamare Shipping also receives a fee of 0.75% on all gross freight, demurrage, charter hire and ballast bonus
or other income earned with respect to each containership in our fleet. The initial term of the Group Management Agreement expires on December 31, 2015. The Group Management Agreement automatically renews for five consecutive one-year periods until December 31, 2020, at which point the
Group Management Agreement will expire. The management fee of $850 per day for each containership is fixed until December 31, 2012 and will thereafter be annually adjusted upwards by 4%, with further annual increases permitted to reflect any strengthening of the Euro against the U.S. dollar and/or
material unforeseen cost increases. After the initial term expires on December 31, 2015, we will be able to terminate the Group Management Agreement, subject to a termination fee, by providing written notice to Costamare Shipping at least 12 months before the end of the subsequent one-year term.
The termination fee is equal to (a) the lesser of (i) five and (ii) the number of full years remaining prior to December 31, 2020, times (b) the aggregate fees due and payable to Costamare Shipping during the 12-month period ending on the date of termination (without taking into account any reduction
in fees to reflect that certain obligations have been delegated to a sub-manager), provided that the termination fee will always be at least two times the aggregate fees over the 12-month period described above. Information about other termination events under the Group Management Agreement is set
forth in “Our Managers and Management-Related Agreements—Term and Termination Rights”. Pursuant to the terms of our Group Management Agreement and separate ship-management agreements and supervision agreements, liability of our managers to us is limited to instances of gross negligence or
willful misconduct on the part of the managers. Further, we are required to indemnify the managers for liabilities incurred by the managers in performance of the Group Management Agreement and separate ship-management agreements and supervision agreements, except in instances of gross negligence
or willful misconduct on the part of the managers. Competition We operate in markets that are highly competitive and based primarily on supply and demand. Generally, we compete for charters based upon charter rate, customer relationships, operating expertise, professional reputation and containership specifications, size, age and condition. Competition for
providing containership services comes from a number of experienced shipping companies, including a number of our competitors who have been financed by the German KG system, which was based on tax benefits provided to private investors. 35
Participants in the container shipping industry include “liner” shipping companies, who operate container shipping services and own containerships, containership owners, often known as “charter owners”, who own containerships and charter them out to liner companies, and shippers who require the
seaborne movement of containerized goods. Historically, a significant share of the world’s containership capacity has been owned by the liner companies, but since the 1990s there has been an increasing trend for the liner companies to charter-in a larger proportion of the capacity that they operate as a
way of retaining some degree of flexibility with regard to capital spending levels over time given the significant costs associated with purchasing vessels. We believe that the containership sector of the international shipping industry is characterized by the significant time required to develop the operating expertise and professional reputation necessary to obtain and retain customers. We believe that our development of a large fleet of containerships
with varying TEU capacities has enhanced our relationship with our principal charterers by enabling them to serve the East-West, North-South and Intra-regional trade routes efficiently, while enabling us to operate in the different rate environments prevailing for those routes. We also believe that our
focus on customer service and reliability enhances our relationships with our charterers. In the past decade, we have had successful chartering relationships with the majority of the top 20 liner companies by TEU capacity. In the past, we have been able to address the periodic scarcity of secondhand containerships available for acquisition in the open market though the acquisition of containerships mainly from our liner company customers in privately negotiated sales. In connection with these acquisitions we then
typically charter back the vessels to these customers. We believe we have been able to pursue these privately negotiated acquisitions because of our long-standing customer relations, which we do not believe new entrants have. Crewing and Shore Employees We have three shore-based officers, our chairman and chief executive officer, our chief financial officer and our general counsel and secretary. In each case their services are provided under the Group Management Agreement with Costamare Shipping. As of December 31, 2011, approximately 2,000
people served in a pool of personnel who rotate their service onboard the containerships in our fleet. Costamare Shipping, CIEL and Shanghai Costamare, our managers, each employed approximately 90, 40 and 30 people, respectively, all of whom were shore-based. In addition, our managers are
responsible for recruiting, either directly or through a crewing agent, the senior officers and all other crew members for our containerships. Recruiting is arranged directly through our managers’ crewing offices in Athens, Greece and Shanghai, China, and indirectly through our related crewing agent, C-
Man Maritime, in the Philippines, and independent manning agents in Romania and Bulgaria. We believe the streamlining of crewing arrangements through our managers ensures that all of our vessels will be crewed with experienced crews that have the qualifications and licenses required by international
regulations and shipping conventions. We have not experienced any material work stoppages due to labor disagreements during the past three years. Permits and Authorizations We are required by various governmental and other agencies to obtain certain permits, licenses, certificates and financial assurances with respect to each of our vessels. The kinds of permits, licenses, certificates and financial assurances required by governmental and other agencies depend upon several
factors, including the commodity being transported, the waters in which the vessel operates, the nationality of the vessel’s crew and the type and age of the vessel. All permits, licenses, certificates and financial assurances currently required to operate our vessels have been obtained (exclusive of cargo-
specific documentation, for which charterers or shippers are responsible). Additional laws and regulations, environmental or otherwise, may be adopted which could limit our ability to do business or increase the cost of doing business. 36
Risk of Loss and Liability Insurance General The operation of any vessel includes risks such as mechanical failure, collision, property loss or damage, cargo loss or damage and business interruption due to a number of reasons, including political circumstances in foreign countries, hostilities and labor strikes. In addition, there is always an
inherent possibility of marine disaster, including oil spills and other environmental mishaps, as well as other liabilities arising from owning and operating vessels in international trade. The U.S. Oil Pollution Act of 1990 (“OPA 90”), which imposes under certain circumstances unlimited liability upon
owners, operators and demise charterers of vessels trading in the United States exclusive economic zone for certain oil pollution accidents in the United States, has made liability insurance more expensive for ship-owners and operators trading in the United States market. We maintain hull and machinery marine risks insurance and hull and machinery war risks insurance for our fleet of containerships to cover normal risks in our operations and in amounts that we believe to be prudent to cover such risks. In addition, we maintain protection and indemnity insurance up
to the maximum insurable limit available at any given time. While we believe that our insurance coverage will be adequate, not all risks can be insured, and there can be no guarantee that we will always be able to obtain adequate insurance coverage at reasonable rates or at all, or that any specific claim
we may make under our insurance coverage will be paid. Hull & Machinery Marine Risks Insurance, Hull & Machinery War Risks Insurance and Loss of Hire Insurance We maintain hull and machinery marine risks insurance and hull and machinery war risks insurance, which cover the risk of particular average, general average, 4/4ths collision liability, contact with fixed and floating objects and actual or constructive total loss in accordance with the Swedish Hull
conditions. Each of our containerships is insured up to what we believe to be at least its fair market value, after meeting certain deductibles. We do not and will not obtain loss of hire insurance (or any other kind of business interruption insurance) covering the loss of revenue during off-hire periods for any of our vessels because we believe that this type of coverage is not economical and is of limited value to us, in part because
historically our vessels have had a very limited number of off-hire days. Protection and Indemnity Insurance—Pollution Coverage Protection and indemnity insurance is usually provided by a protection and indemnity association (the “P&I association”) and covers third-party liability, crew liability and other related expenses resulting from the injury or death of crew, passengers and other third parties, the loss or damage to cargo,
third-party claims arising from collisions with other vessels (to the extent not recovered by the hull and machinery policies), damage to other third-party property, pollution arising from oil or other substances and salvage, towing and other related costs, including wreck removal. Our protection and indemnity insurance is provided by a P&I association, which is a member of the International Group of P&I Clubs (“International Group”). The 14 P&I associations that comprise the International Group insure approximately 90% of the world’s commercial blue-water tonnage and have
entered into a pooling agreement to reinsure each association’s liabilities. Insurance provided by a P&I association is a form of mutual indemnity insurance. Our protection and indemnity insurance coverage is currently subject to a limit of about $5 billion per vessel per incident except that for pollution the limit is set at $1 billion per vessel per incident, and for war risks the limit is set at $500 million per vessel per incident. As a member of a P&I association, which is a member of the International Group, we will be subject to calls payable to the P&I association based on the International Group’s claim records as well as the claim records of all other members of the P&I association of which we are a member. 37
On October 5, 2011, our vessel Rena ran aground on the Astrolabe Reef off New Zealand and sustained significant damage. The vessel was determined to be a constructive total loss for insurance purposes. We have been cooperating with our protection and indemnity insurers and New Zealand
governmental authorities to address the consequences of this incident. Inspection by Classification Societies Every seagoing vessel must be “classed” by a classification society. The classification society certifies that the vessel is “in class”, signifying that the vessel has been built and maintained in accordance with the rules of the classification society and complies with applicable rules and regulations of the
vessel’s country of registry and the international conventions of which that country is a member. In addition, where surveys are required by international conventions and corresponding laws and ordinances of a flag state, the classification society will undertake them on application or by official order,
acting on behalf of the authorities concerned. The classification society also undertakes on request other surveys and checks that are required by regulations and requirements of the flag state. These surveys are subject to agreements made in each individual case and/or to the regulations of the country concerned. For maintenance of the class, regular and extraordinary surveys of hull and machinery, including the electrical plant, and any special equipment classed are required to be performed as follows: Annual Surveys. For seagoing ships, annual surveys are conducted for the hull and the machinery, including the electrical plant, and where applicable, on special equipment classed at intervals of 12 months from the date of commencement of the class period indicated in the certificate. Intermediate Surveys. Extended annual surveys are referred to as intermediate surveys and typically are conducted two and one-half years after commissioning and each class renewal. Intermediate surveys may be carried out on the occasion of the second or third annual survey. Class Renewal Surveys. Class renewal surveys, also known as special surveys, are carried out on the ship’s hull and machinery, including the electrical plant, and on any special equipment classed at the intervals indicated by the character of classification for the hull. During the special survey, the
vessel is thoroughly examined, including audio-gauging to determine the thickness of the steel structures. Should the thickness be found to be less than class requirements, the classification society would prescribe steel renewals. The classification society may grant a one-year grace period for completion of
the special survey. Substantial amounts of funds may have to be spent for steel renewals to pass a special survey if the vessel experiences excessive wear and tear. In lieu of the special survey every four or five years, depending on whether a grace period is granted, a ship-owner has the option of
arranging with the classification society for the vessel’s hull or machinery to be on a continuous survey cycle, in which every part of the vessel would be surveyed within a five-year cycle. At a ship-owner’s application, the surveys required for class renewal may be split according to an agreed schedule to
extend over the entire period of class. This process is referred to as continuous class renewal. All areas subject to surveys as defined by the classification society are required to be surveyed at least once per class period, unless shorter intervals between surveys are otherwise prescribed. The period between two consecutive surveys of each area must not exceed five years. All vessels are also dry-docked at least once every five years for inspection of their underwater parts and for repairs related to such inspections. If any defects are found, the classification surveyor will issue a “recommendation” which must be rectified by the ship-owner within prescribed time limits. Insurance underwriters make it a condition for insurance coverage that a vessel be certified as “in class” by a classification society which is a member of the International Association of Classification Societies (“IACS”). All of our vessels are certified as being “in class” by members of IACS. 38
The following table lists the dates by which we expect to carry out the next dry-dockings and special surveys for the vessels in our current vessel fleet: Dry-docking Schedule(1)
2012
2013
2014
2015
2016 Number of vessels
8
9
10
12
8 Number of vessels to be dry-docked that are more than 30 years old (included in above figure)
—
—
3
2
—
(1)
Excludes the ten newbuild vessels that we have agreed acquire.
Environmental and Other Regulations Government regulation affects the ownership and operation of our vessels in a significant manner. We are subject to international conventions and national, port state and local laws and regulations applicable to international waters and/or territorial waters of the countries in which our vessels may
operate or are registered, including those governing the management and disposal of hazardous substances and wastes, the cleanup of oil spills and the management of other contamination, air emissions, and grey water and ballast water discharges. These laws and regulations include OPA 90, the U.S.
Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), the U.S. Clean Water Act (“CWA”), the U.S. Clean Air Act (“CAA”) and regulations adopted by the International Maritime Organization (“IMO”), including the International Convention for Prevention of
Pollution from Ships (“MARPOL”) and the International Convention for Safety of Life at Sea (“SOLAS”), as well as regulations enacted by the European Union and other international, national and local regulatory bodies. Compliance with these laws, regulations and other requirements entails
significant expense, including vessel modifications and implementation of certain operating procedures. A variety of governmental and private entities subject our vessels to both scheduled and unscheduled inspections. These entities include the local port authorities Port State Control (such as the U.S. Coast Guard, harbor master or equivalent), classification societies, flag state administration (country of
registry) and charterers. Certain of these entities require us to obtain permits, licenses, financial assurances and certificates for the operation of our vessels. Failure to maintain necessary permits or approvals could require us to incur substantial costs or temporarily suspend the operation of one or more of
our vessels in one or more ports. We believe that the heightened level of environmental and quality concerns among insurance underwriters, regulators and charterers is leading to greater inspection and safety requirements for all vessels and may accelerate the scrapping of older vessels throughout the container shipping industry.
Increasing environmental concerns have created a demand for vessels that conform to the strictest environmental standards. We will be required to maintain operating standards for all of our vessels that emphasize operational safety, quality maintenance, continuous training of our officers and crews and
compliance with U.S. and international regulations. Our managers and our vessels are certified in accordance with ISO 9001-2008 and ISO 14001-2004 relating to quality management and environmental standards. Our containerships are subject to standards imposed by the IMO, the United Nations agency for maritime safety and the prevention of pollution by ships. The IMO has adopted regulations that are designed to reduce pollution in international waters, both from accidents and from routine operations,
and has negotiated international conventions that impose liability for oil pollution in international waters and a signatory’s territorial waters. For example, Annex III of MARPOL regulates the transportation of marine pollutants and imposes standards on packing, marking, labeling, documentation,
stowage, quantity limitations and pollution prevention. These requirements have been expanded by the International Maritime Dangerous Goods Code, which imposes additional standards for all aspects of the transportation of dangerous goods and marine pollutants by sea. Annex VI to MARPOL, which
became effective on May 19, 2005, sets limits on sulfur oxide 39
and nitrogen oxide emissions from vessel exhausts and prohibits deliberate emissions of ozone depleting substances, such as chlorofluorocarbons. Annex VI also includes a global cap on the sulfur content of fuel oil and allows for special areas to be established with more stringent controls on sulfur
emissions. In addition, amendments to Annex VI that entered into force in July 2010 seek to reduce air pollution from vessels by, among other things, establishing a series of progressive requirements to further limit the sulfur content of fuel oil that will be phased in through 2020 and by establishing new
tiers of nitrogen oxide emission standards for new marine diesel engines, depending on their date of installation. Additionally, more stringent emission standards could apply in the coastal areas currently designated as Emission Control Areas, such as the Baltic Sea, North Sea and United States and
Canadian coastal areas, and any such areas designated in the future. All our existing containerships are generally compliant with current Annex VI requirements, except that for those built before 2000, we may incur costs under these or other requirements in the future, such as the installation of control
equipment on our containership engines to comply with nitrogen oxide emission requirements. The International Convention on Civil Liability for Bunker Oil Pollution Damage (the “Bunker Convention”), which became effective in November 2008, imposes strict liability on vessel owners for pollution damage in jurisdictional waters of ratifying states caused by discharges of bunker fuel. The
Bunker Convention also requires registered owners of vessels over 1,000 gross tons to maintain insurance in specified amounts to cover liability for bunker fuel pollution damage. Each of our containerships has been issued a certificate attesting that insurance is in force in accordance with the Bunker
Convention. In 2004, the IMO also adopted an International Convention for the Control and Management of Ships’ Ballast Water and Sediments (the “BWM Convention”). The BWM Convention’s implementing regulations call for a phased introduction of mandatory ballast water exchange requirements,
to be replaced in time with mandatory concentration limits. The BWM Convention will not enter into force until 12 months after it has been ratified by 30 states, the combined merchant fleets of which represent not less than 35% of the gross tonnage of the world’s merchant shipping. To date, the BWM
Convention has not yet entered into force because it has not been ratified by a sufficient number of countries to meet this threshold. The operation of our vessels is also affected by the requirements set forth in the IMO’s Management Code for the Safe Operation of Ships and Pollution Prevention (the “ISM Code”). The ISM Code requires vessel owners, bareboat charterers and management companies to develop and maintain an
extensive Safety Management System (“SMS”) that includes the adoption of a safety and environmental protection policy, sets forth instructions and procedures for safe operation and describes procedures for dealing with emergencies. The ISM Code requires that vessel operators obtain a “Safety
Management Certificate” for each vessel they operate from the government of the vessel’s flag state. The certificate verifies that the vessel operates in compliance with its approved SMS. Noncompliance by a vessel owner, manager or bareboat charterer with the ISM Code may subject such party to
increased liability, invalidate existing insurance or decrease available insurance coverage for the affected vessels and result in a denial of access to, or detention in, certain ports. Our managers and each of our containerships is ISM Code-certified. United States Requirements OPA 90 established an extensive regulatory and liability regime for the protection of the environment from oil spills and cleanup of oil spills. OPA 90 applies to discharges of any oil from a vessel, including discharges of fuel and lubricants. OPA 90 affects all owners and operators whose vessels trade
in the United States, its territories and possessions or whose vessels operate in U.S. waters, which include the United States’ territorial sea and its two hundred nautical mile exclusive economic zone. While we do not carry oil as cargo, we do carry fuel in our containerships, making them subject to the
requirements of OPA 90. Under OPA 90, vessel owners, operators and bareboat charterers are “responsible parties” and are jointly, severally and strictly liable (unless the discharge of pollutants results solely from the act or omission of a third party, an act of God or an act of war) for all containment and clean-up costs 40
and other damages arising from discharges or threatened discharges, of pollutants from their vessels, including bunkers. OPA 90 defines these other damages broadly to include:
natural resource damages and the costs of assessment thereof; • real and personal property damage; • net loss of taxes, royalties, rents, fees and other lost revenues; • lost profits or impairment of earning capacity due to property or natural resource damages; and • net cost of public services necessitated by a spill response, such as protection from fire, safety or health hazards, and loss of subsistence use of natural resources. OPA 90 preserves the right to recover damages under other existing laws, including maritime tort law. U.S. Coast Guard regulations limit OPA 90 liability to the greater of $1,000 per gross ton or $854,400 per incident for non-tank vessels, subject to a procedure for periodically adjusting such limits. These limits of liability do not apply if an incident was directly caused by violation of applicable U.S.
safety, construction or operating regulations or by a responsible party’s gross negligence or willful misconduct, or if the responsible party fails or refuses to report the incident or to cooperate and assist in connection with oil removal activities. CERCLA applies to spills or releases of hazardous substances other than petroleum or petroleum products whether on land or at sea. CERCLA imposes joint and several liability, without regard to fault, on the owner or operator of a vessel, vehicle or facility from which there has been a release,
along with other specified parties. Costs recoverable under CERCLA include cleanup and removal costs, natural resource damages and governmental oversight costs. Liability under CERCLA is generally limited to the greater of $300 per gross ton or $5.0 million for vessels carrying any hazardous
substances, such as cargo or residue, or $0.5 million for any other vessel, per release of or incident involving hazardous substances. These limits of liability do not apply if the incident is caused by gross negligence, willful misconduct or a violation of certain regulations, in which case liability is unlimited. All owners and operators of vessels over 300 gross tons are required to establish and maintain with the U.S. Coast Guard evidence of financial responsibility sufficient to meet their potential liabilities under OPA 90 and CERCLA. Under the U.S. Coast Guard regulations, vessel owners and operators
may evidence their financial responsibility by showing proof of insurance, surety bond, guarantee, letter of credit or self-insurance. An owner or operator of a fleet of vessels is required only to demonstrate evidence of financial responsibility in an amount sufficient to cover the vessel in the fleet having
the greatest maximum liability under OPA 90 and CERCLA. Under the self-insurance provisions, the vessel owner or operator must have a net worth and working capital, measured in assets located in the United States against liabilities located anywhere in the world, that exceeds the applicable amount
of financial responsibility. The U.S. Coast Guard’s regulations concerning certificates of financial responsibility provide, in accordance with OPA 90, that claimants may bring suit directly against an insurer or guarantor that furnishes certificates of financial responsibility. In the event that such insurer or guarantor is sued
directly, it is prohibited from asserting any contractual defense that it may have had against the responsible party and is limited to asserting those defenses available to the responsible party and the defense that the incident was caused by the willful misconduct of the responsible party. Certain
organizations, which had typically provided certificates of financial responsibility under pre-OPA 90 laws, including the major P&I associations, have declined to furnish evidence of insurance for vessel owners and operators if they are subject to direct actions or required to waive insurance policy defenses.
This requirement may have the effect of limiting the availability of the type of vessel coverage required by the U.S. Coast Guard and could increase our costs of obtaining this insurance for our fleet, as well as the costs of our competitors that also require such coverage. OPA 90 specifically permits individual states to impose their own liability regimes with regard to oil pollution incidents occurring within their boundaries, and some states have enacted legislation 41
•
providing for unlimited liability for oil spills. In some cases, states which have enacted such legislation have not yet issued implementing regulations defining vessels owners’ responsibilities under these laws. We intend to comply with all applicable state regulations in the ports where our vessels call. We will maintain, for each of our containerships, oil pollution liability coverage insurance in the amount of $1.0 billion per vessel per incident. In addition, we carry hull and machinery and protection and indemnity insurance to cover the risks of fire and explosion. Although our containerships will
only carry bunker fuel, a spill of oil from one of our vessels could be catastrophic under certain circumstances. Losses as a result of fire or explosion could also be catastrophic under some conditions. While we believe that our present insurance coverage is adequate, not all risks can be insured, and if the
damages from a catastrophic spill exceeded our insurance coverage, the payment of those damages could have an adverse effect on our business or the results of our operations. Title VII of the Coast Guard and Maritime Transportation Act of 2004 (the “CGMTA”) amended OPA 90 to require the owner or operator of any non-tank vessel of 400 gross tons or more that carries oil of any kind as a fuel for main propulsion, including bunker fuel, to prepare and submit a
response plan for each vessel. These vessel response plans include detailed information on actions to be taken by vessel personnel to prevent or mitigate any discharge or substantial threat of such a discharge of oil from the vessel due to operational activities or casualties. Where required, each of our
containerships has an approved response plan. The CWA prohibits the discharge of oil or hazardous substances in navigable waters and imposes liability in the form of penalties for any unauthorized discharges. It also imposes substantial liability for the costs of removal, remediation and damages and complements the remedies available under the
more recently enacted OPA 90 and CERCLA, discussed above. The U.S. Environmental Protection Agency (the “EPA”) regulates the discharge of ballast water and other substances under the CWA. EPA regulations require vessels 79 feet in length or longer (other than commercial fishing vessels) to
obtain coverage under a Vessel General Permit (“VGP”) authorizing discharges of ballast waters and other wastewaters incidental to the operation of vessels when operating within the three-mile territorial waters or inland waters of the United States. The VGP requires vessel owners and operators to
comply with a range of best management practices and reporting and other requirements for a number of incidental discharge types. The EPA has proposed a new VGP to become effective in 2013 that, if finalized, will impose, among other things, numerical ballast water discharge limits. We have
obtained coverage under the current version of the VGP for all of our containerships that operate in U.S. waters. We do not believe that any costs associated with meeting the requirements under the VGP will be material. The U.S. National Invasive Species Act (“NISA”) was enacted in 1996 in response to growing reports of harmful organisms being released into U.S. ports through ballast water taken on by vessels in foreign ports. The U.S. Coast Guard adopted regulations under NISA in July 2004 that impose
mandatory ballast water management practices for all vessels equipped with ballast water tanks entering U.S. waters. These requirements can be met by performing mid-ocean ballast exchange, by retaining ballast water on board the vessel or by using environmentally sound alternative ballast water
management methods approved by the U.S. Coast Guard. However, mid-ocean ballast exchange is mandatory for vessels heading to the Great Lakes or Hudson Bay. Mid-ocean ballast exchange is the primary method for compliance with the U.S. Coast Guard regulations, since holding ballast water can
prevent vessels from performing cargo operations upon arrival in the United States and alternative methods are still under development. Vessels that are unable to conduct mid-ocean ballast exchange due to voyage or safety concerns may discharge minimum amounts of ballast water (in areas other than
the Great Lakes and Hudson Bay), provided that they comply with record keeping requirements and document the reasons they could not follow the required ballast water management requirements. The U.S. Coast Guard is proposing new ballast water management standards and practices that could
ultimately lead to the establishment of maximum acceptable discharge limits for various invasive species and/or requirements for active treatment of ballast water. Several states, including Michigan and California, have adopted legislation or regulations relating to the permitting and management of ballast
water discharges. California has 42
extended its ballast water management program to the regulation of “hull fouling” organisms attached to vessels and adopted regulations limiting the number of organisms in ballast water discharges. Other states could adopt similar requirements that could increase the costs of operation in state waters. The EPA has adopted standards under the CAA that pertain to emissions from vessel vapor control and recovery and other operations in regulated port areas and emissions from model year 2004 and later large marine diesel engines. Several states also regulate emissions from vapor control and
recovery under authority of State Implementation Plans adopted under the CAA. On April 30, 2010, the EPA promulgated regulations that impose more stringent standards for emissions of particulate matter, sulfur oxides and nitrogen oxides from new Category 3 marine diesel engines on vessels
constructed on or after January 1, 2016 and registered or flagged in the U.S. and implement the new MARPOL Annex VI requirements for U.S. and foreign flagged ships entering U.S. ports or operating in U.S. internal waters. The EPA is also considering a petition from a number of environmental
groups that requests the EPA to impose more stringent emissions limits on foreign-flagged vessels operating in U.S. waters. In addition, California has adopted emission limits for auxiliary diesel engines of ocean-going vessels operating within 24 miles of the California coast and require operators to use
low content fuel. If new or more stringent regulations relating to emissions from marine diesel engines or port operations by ocean-going vessels are adopted by the EPA or states, these requirements could require significant capital expenditures or otherwise increase the costs of our operations. European Union Requirements The European Union has also adopted legislation that (1) requires member states to refuse access to their ports to certain sub-standard vessels, according to vessel type, flag and number of previous detentions, (2) obliges member states to inspect at least 25% of foreign vessels using their ports
annually and provides for increased surveillance of vessels posing a high risk to maritime safety or the marine environment, (3) provides the European Union with greater authority and control over classification societies, including the ability to seek to suspend or revoke the authority of negligent
societies, and (4) requires member states to impose criminal sanctions for certain pollution events, such as the unauthorized discharge of tank washings. Other Regional Requirements The environmental protection regimes in certain other countries, such as Canada, resemble those of the United States. To the extent we operate in the territorial waters of such countries or enter their ports, our containerships would typically be subject to the requirements and liabilities imposed in
such countries. Other regions of the world also have the ability to adopt requirements or regulations that may impose additional obligations on our containerships and may entail significant expenditures on our part and may increase the costs of our operations. These requirements, however, would apply to
the industry operating in those regions as a whole and would also affect our competitors. Greenhouse Gas Regulations The MEPC of IMO adopted two new sets of mandatory requirements to address greenhouse gas emissions from ships at its July 2011 meeting. The Energy Efficiency Design Index will require a minimum energy efficiency level per capacity mile and will be applicable to new vessels, and the Ship
Energy Efficiency Management Plan will be applicable to currently operating vessels. The requirements will enter into force in January 2013 and could cause us to incur additional compliance costs. The IMO is also considering the development of a market-based mechanism for greenhouse gas emissions
from ships, but it is difficult to accurately predict the likelihood that such a standard might be adopted or its potential impact on our operations at this time. The European Union has indicated that it intends to propose an expansion of the existing European Union emissions trading scheme to include emissions of greenhouse gases from marine ships. In the United States, the EPA has issued a finding that greenhouse gases endanger the public health and
safety and has adopted regulations under the CAA to limit greenhouse gas emissions 43
from certain mobile sources and large stationary sources. Although the mobile source emissions do not apply to greenhouse gas emissions from ships, the EPA is considering a petition from the California Attorney General and environmental groups to regulate greenhouse gas emissions from ocean-going
ships. Any passage of climate control legislation or other regulatory initiatives by the IMO, the European Union, the United States or other countries where we operate, or any treaty adopted at the international level to succeed the Kyoto Protocol, that restrict emissions of greenhouse gases could require
us to make significant financial expenditures that we cannot predict with certainty at this time. Vessel Security Regulations A number of initiatives have been introduced in recent years intended to enhance vessel security. On November 25, 2002, the Maritime Transportation Security Act of 2002 (the “MTSA”) was signed into law. To implement certain portions of the MTSA, the U.S. Coast Guard issued regulations in
July 2003 requiring the implementation of certain security requirements aboard vessels operating in waters subject to the jurisdiction of the United States. Similarly, in December 2002, amendments to SOLAS created a new chapter of the convention dealing specifically with maritime security. This new
chapter came into effect in July 2004 and imposes various detailed security obligations on vessels and port authorities, most of which are contained in the newly created International Ship and Port Facilities Security Code (the “ISPS Code”). Among the various requirements are:
•
on-board installation of automatic information systems to enhance vessel-to-vessel and vessel-to-shore communications; • on-board installation of ship security alert systems; • the development of ship security plans; and • compliance with flag state security certification requirements. The U.S. Coast Guard regulations, intended to align with international maritime security standards, exempt non-U.S. vessels from MTSA vessel security measures, provided such vessels have on board a valid “International Ship Security Certificate” that attests to the vessel’s compliance with SOLAS
security requirements and the ISPS Code. We have implemented the various security measures required by the IMO, SOLAS and the ISPS Code and have approved ISPS certificates and plans certified by the applicable flag state on board all our containerships. C. Organizational Structure As of February 15, 2012, Costamare Inc. is a holding company incorporated in the Republic of The Marshall Islands with 80 subsidiaries all of which are incorporated in Liberia. Of our Liberian subsidiaries, 57 either own vessels in our fleet or are parties to contracts to obtain newbuild vessels. Our
subsidiaries are wholly-owned by us. A list of our subsidiaries as of January 1, 2012 is set forth in Exhibit 8.1 to this annual report. D. Property, Plant and Equipment We have no freehold or material leasehold interest in any real property. We occupy office space at 60 Zephyrou Street & Syngrou Avenue, 17564, Athens, Greece, that is provided to us as part of the services we receive under the Group Management Agreement. Other than our vessels, we do not
have any material property. Our vessels are subject to priority mortgages, which secure our obligations under our various credit facilities. For further details regarding our credit facilities, refer to “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Credit Facilities”
and “Item 3. Business Overview—Risk of Loss and Liability Insurance—Environmental and Other Regulations”. ITEM 4.A. UNRESOLVED STAFF COMMENTS None. 44
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this annual report. This discussion includes forward-looking statements that involve risks and uncertainties. As a
result of many factors, such as those set forth under “Item 3. Key Information—D. Risk Factors” and elsewhere in this annual report, our actual results may differ materially from those anticipated in these forward-looking statements. Please see the section “Forward-Looking Statements” at the beginning of this
annual report. Overview We are an international owner of containerships, chartering our vessels to many of the world’s largest liner companies. As of February 15, 2012, we had a fleet of 57 containerships aggregating approximately 327,000 TEU, making us one of the largest public containership companies in the world,
based on total TEU capacity. At that date, our fleet consisted of (i) 47 vessels in the water, aggregating approximately 238,000 TEU and (ii) ten newbuild vessels aggregating approximately 89,000 TEU that are scheduled to be delivered to us between October 2012 and January 2014. See “Item 4.
Information on the Company—Business Overview—Our Fleet, Acquisitions and Newbuild Vessels”. We principally deploy our containerships on multi-year, fixed-rate time charters to take advantage of the stable cash flows and high utilization rates typically associated with multi-year time charters. Time-chartered containerships are generally employed on multi-year charters to liner companies that
charter-in vessels on a multi-year basis as part of their business strategies. As of February 15, 2012, the average (weighted by TEU capacity) remaining time-charter duration for our fleet of 57 containerships was 5.7 years, based on the remaining fixed terms and assuming the exercise of any owner’s options and the non-exercise of any charterer’s options under our
containerships’ charters. As of December 31, 2011, our fixed-term charters represented an aggregate of $3.0 billion of contracted revenue, assuming the earliest redelivery dates possible and 365 revenue days per annum per containership. See the table entitled “Contracted Revenue and Days From Time
Charters as of December 31, 2011” in “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Results of Operations—Voyage Revenue”. As of February 15, 2012, our fixed-term charters represented an aggregate of $3.0 billion of contracted revenue, assuming the earliest redelivery
dates possible and 365 revenue days per annum per containership. The table below provides additional information about the charter coverage for our fleet of containerships as of December 31, 2011. Except as indicated in the footnotes, it does not reflect events occurring after that date, including any charter contract we entered into after that date. It does reflect
our contracts to acquire newbuild vessels. The table assumes the earliest redelivery dates possible under our containerships’ charters. See “Item 4. Information on the Company—Business Overview—Our Fleet and Newbuild Vessels”.
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021 No. of Vessels whose Charters Expire
12
3
6
1
4
6
16
1
2
1 TEU of Expiring Charters
41,069
11,635
16,234
2,633
19,730
38,063
125,953
6,644
13,288
6,724 Contracted Days
14,826
13,984
13,935
12,987
12,409
10,707
5,159
3,238
2358
2,130 Available Days
2,351
4,814
6,445
5,993
6,6620
8,273
12,970
13,917
14,844
15,025 Contracted/Total Days(1)
86.3
%
74.4
%
68.4
%
68.4
%
65.2
%
56.4
%
28.5
%
18.9
%
13.7
%
12.4
%
(1)
Total days are calculated on the assumption that the vessels will continue trading until the age of 30 years old, unless the vessel will exceed 30 years of age at the expiry of its current time charter, in which case we assume that the vessel continues trading until that expiry date.
Our containership fleet is currently under time charters with eight different charterers. For the three years ended December 31, 2011, our three largest customers by revenue were A.P. Moller- 45
Maersk, MSC and COSCO; together these three customers represented 74%, 75% and 68% of our revenue in 2009, 2010 and 2011, respectively. We dry-dock our vessels when the next survey (dry-dock survey or special survey) is scheduled to become due, ranging from 30 to 60 months. We have dry-docked 26 vessels over the past 3 years, and we plan to dry-dock eight vessels in 2012 and nine vessels in 2013. Information about our fleet dry-
docking schedule through 2016 is set forth in a table in “Business Overview—Risk of Loss and Liability Insurance—Inspection by Classification Societies—Dry-docking”. Our Manager The operations of our fleet of containerships are managed by Costamare Shipping, CIEL and Shanghai Costamare, our managers, under the supervision of our chairman and chief executive officer and our chief financial officer, in conjunction with our board of directors. Costamare Shipping receives a
fee of $850 per day ($425 per day in the case of a containership subject to a bareboat charter) for each containership, pro rated for the calendar days we own each containership, for providing us with general administrative services, certain commercial services, director and officer related insurance services
and the services of our officers (but not for payment of such officer’s compensation) and for providing the relevant containership owning subsidiaries with technical, commercial, insurance, accounting, provisions, sale and purchase, crewing and bunkering services. In the event that Costamare Shipping
decides to delegate certain or all of the services it has agreed to perform, either through subcontracting to CIEL or Shanghai Costamare or by directing CIEL or Shanghai Costamare to enter into a direct ship-management agreement with the relevant containership owning subsidiary, then, in the case of
subcontracting, Costamare Shipping will be responsible for paying the management fee charged by the relevant sub-manager for providing such services and, in the case of a direct ship-management agreement, the fee received by Costamare Shipping will be reduced by the fee payable to CIEL or, as the
case may be, Shanghai Costamare under the relevant direct ship-management agreement. As a result, these arrangements will not result in any increase in the aggregate management fees we pay. In addition to management fees, we pay for any capital expenditures, financial costs, operating expenses and
any general and administrative expenses, including the salaries of our officers and employees and payments to third parties in accordance with the Group Management Agreement and the relevant separate ship-management agreements or supervision agreements. We also pay to Costamare Shipping a flat
fee of $700,000 per newbuild vessel for the supervision of the construction of any newbuild vessel for which we may contract. Costamare Shipping also receives a fee of 0.75% on all gross freight, demurrage, charter hire, ballast bonus or other income earned with respect to each containership in our fleet. The initial term of the Group Management Agreement with Costamare Shipping expires on December 31, 2015. The Group Management Agreement automatically renews for five consecutive one-year periods until December 31, 2020, at which point the Group Management Agreement will expire.
The management fee of $850 per day for each containership is fixed until December 31, 2012 and will thereafter be annually adjusted upwards by 4%, with further annual increases permitted to reflect any strengthening of the Euro against the U.S. dollar and/or material unforeseen cost increases. After
the initial term expires on December 31, 2015, we will be able to terminate the Group Management Agreement, subject to a termination fee, by providing written notice to Costamare Shipping at least 12 months before the end of the subsequent one-year term. The termination fee is equal to (a) the
lesser of (i) five and (ii) the number of full years remaining prior to December 31, 2020, times (b) the aggregate fees due and payable to Costamare Shipping during the 12-month period ending on the date of termination (without taking into account any reduction in fees to reflect that certain obligations
have been delegated to a sub-manager), provided that the termination fee will always be at least two times the aggregate fees over the 12-month period described above. Information about other termination events under the Group Management Agreement is set forth in “Our Managers and Management-
Related Agreements—Term and Termination Rights”. Pursuant to the terms of our Group Management Agreement and separate ship-management agreements and supervision agreements, liability of our managers to us is limited to instances of 46
gross negligence or willful misconduct on the part of the managers. Further, we are required to indemnify the managers for liabilities incurred by the managers in performance of the Group Management Agreement and separate ship-management agreements and supervision agreements, except in instances
of gross negligence or willful misconduct on the part of the managers. A. Operating Results Factors Affecting Our Results of Operations Our financial results are largely driven by the following factors:
Number of Vessels in Our Fleet. The number of vessels in our fleet is a key factor in determining the level of our revenues. Aggregate expenses also increase as the size of our fleet increases. Vessel acquisitions and dispositions give rise to gains and losses and other one-time items. During 2007 and
2008, we increased the number of vessels in our fleet so that on October 31, 2008 our fleet consisted of 53 containerships. Thereafter, from 2009 through the first half of 2010, in response to the global economic recession, we reduced our fleet through dispositions to 41 vessels. Beginning in the
second half of 2010, when the market started to recover and vessel prices were at an attractive point, we have substantially grown our fleet to a total of 57 vessels as of February 15, 2012, including ten newbuild vessels on order. • Charter Rates. The charter rates we obtain for our vessels also drive our revenues. Charter rates are based primarily on demand and supply of containership capacity at the time we enter into the charters for our vessels. Demand and supply can fluctuate significantly over time as a result of changing
economic conditions affecting trade flow between ports served by liner companies and the industries which use liner shipping services. Although our multi-year charters make us less susceptible to cyclical containership charter rates than vessels operated on shorter-term charters, such as spot charters,
we are exposed to varying charter rate environments when our chartering arrangements expire and we seek to deploy our containerships under new charters. As illustrated in the table above under “—Overview”, the staggered maturities of our containership charters reduce our exposure to any one
particular rate environment and point in the shipping cycle. See “—Voyage Revenue”. • Utilization of Our Fleet. Due to the multi-year time charters under which they generally operate, our containerships have consistently been deployed at high utilization. Nevertheless, the amount of time our vessels spend dry-docked undergoing repairs, maintenance or upgrade work affects our results
of operations. Historically, our fleet has had a limited number of unscheduled off-hire days. In 2009, 2010 and 2011 our fleet utilization based on unscheduled off-hire days as a percentage of total operating days for each year was 99.9%, 99.7% and 99.3%, respectively. However, an increase in
annual off-hire days could reduce our utilization. The efficiency with which suitable employment is secured, the ability to minimize off-hire days and the amount of time spent positioning vessels also affects our results of operations. If the utilization pattern of our containership fleet changes, our
financial results would be affected. • Expenses and Other Costs. Our ability to control our fixed and variable expenses is critical to our ability to maintain acceptable profit margins. These expenses include commission expenses, crew wages and related costs, the cost of insurance, expenses for repairs and maintenance, the cost of spares
and consumable stores, lubricating oil costs, tonnage taxes and other miscellaneous expenses. In addition, factors beyond our control, such as developments relating to market premiums for insurance and the value of the U.S. dollar compared to currencies in which certain of our expenses, primarily
crew wages, are paid, can cause our vessel operating expenses to increase. We proactively manage our foreign currency exposure by entering into Euro/dollar forward contracts covering our Euro-denominated operating expenses. 47
•
Voyage Revenue Our operating revenues are driven primarily by the number of vessels in our fleet, the amount of daily charter hire that our vessels earn under time charters and the number of operating days during which our vessels generate revenues. These factors are, in turn, affected by our decisions relating to
vessel acquisitions and dispositions, the amount of time that we spend positioning our vessels, the amount of time that our vessels spend dry-docked undergoing repairs, maintenance and upgrade work, the age, condition and specifications of our vessels and the levels of supply and demand in the
containership charter market. Charter revenues are generated from fixed-rate time charters and are recorded on a straight-line basis over the term of each time charter (excluding the effect of any options to extend the term). Revenues derived from time charters with escalating rates are accounted for as operating leases and thus
are recognized on a straight-line basis as the average revenue over the rental periods of such agreements, as service is performed, by dividing (i) the aggregate contracted revenues until the earliest expiration date of the time charter by (ii) the total contracted days until the earliest expiration date of the
time charter. Some of our charters provide that the charter rate will be adjusted to a market rate for the final months of their respective terms. For purposes of determining the straight line revenue amount, we exclude these periods and treat the charter as expiring at the end of the last fixed rate period.
Our revenues will be affected by the acquisition of any additional vessels in the future subject to time charters, as well as by the disposition of any existing vessel in our fleet. Our revenues will also be affected if any of our charterers cancel a time charter or if we agree to renegotiate charter terms during
the term of a charter resulting in aggregate revenue reduction. Our time charter arrangements have been contracted in varying rate environments and expire at different times. Generally, we do not employ our vessels under voyage charters under which a ship-owner, in return for a fixed sum, agrees to
transport cargo from one or more loading ports to one or more destinations and assumes all vessel operating costs and voyage expenses. After rising during 2007 and the first half of 2008, charter rates for containerships fell dramatically to 10-year lows during the second half of 2008 and 2009. While rates improved in 2010, they have not recovered to rate levels similar to those seen in late 2005. 2011 has seen increasing charter rates
and asset prices during the first 6 months of the year, followed by steep declines during the latter half, due to reduced transportation demand triggered by the unfolding global sovereign debt crisis and overall volatile financial conditions. While charter rates and the level of demand for containerships are
historically volatile, and there can be no assurance that either will improve, we believe that any continued improvement in the global economy and demand for containerships will lead to an improvement in charter rates over time. The table below provides additional information about our expected revenues based on contracted charter rates as of December 31, 2011. Although these expected revenues are based on contracted charter rates, any contract is subject to various risks, including performance by the counterparties or an
early termination of the contract pursuant to its terms. If the charterers are unable to make charter payments to us, if we agree to renegotiate charter terms at the request of a charterer or if contracts are prematurely terminated for any reason, our results of operations and financial condition may be
materially adversely affected. Historically, we have had no defaults or early terminations by charterers, although in certain cases we have agreed to changes in charter terms. Contracted Revenue and Days From Time Charters as of December 31, 2011
On and After January 1,
2012
2013
2014
2015
2016
Total
(Expressed in thousands of U.S. dollars, except days and percentages) Contracted Revenues(1)(2)
$
362,478
$
393,334
$
440,162
$
430,579
$
1,388,857
$
3,015,410 Fleet Contracted Days(2)
14,826
13,984
13,935
12,987
38,731
94,463 Percentage of fleet contracted days/Total days(2)
86.3
%
74.4
%
68.4
%
68.4
%
25.6
%
41.6
% 48
and
thereafter
(1)
Annual revenue calculations are based on: (a) an assumed 365 revenue days per vessel per annum, (b) the earliest redelivery dates possible under our containerships’ charters, and (c) no exercise of any option to extend the terms of those charters. (2) Some of our charters provide that the charter rate will be adjusted to a market rate for the final months of their respective terms. For purposes of determining contracted revenues and the number of days, we exclude these periods and treat the charter as expiring at the end of the last fixed rate
period. Total days are calculated on the assumption that the vessels will continue trading until the age of 30 years old, unless the vessel will exceed 30 years of age at the expiry of its current time charter, in which case we assume that the vessel continues trading until that expiry date. Voyage Expenses Voyage expenses include port and canal charges, bunker (fuel) expenses, address commissions and brokerage commissions. Under our time charter arrangements, charterers bear the voyage expenses other than address and brokerage commissions. As such, voyage expenses represent a relatively small
portion of our vessels’ overall expenses. During 2010 and 2011, brokerage and address commissions represented 49% and 53% of voyage expenses respectively. These commissions do not include the fees we pay to our manager, which are described below under “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Management Agreement”. Vessels’ Operating Expenses Vessels’ operating expenses include crew wages and related costs, the cost of insurance, expenses for repairs and maintenance, the cost of spares and consumable stores, lubricant costs, statutory and classification expenses and other miscellaneous expenses. Aggregate expenses increase as the size of
our fleet increases. We expect that insurance costs, dry-docking and maintenance costs will increase as our vessels age. Factors beyond our control, some of which may affect the shipping industry in general—for instance, developments relating to market premiums for insurance and changes in the market
price of lubricants due to increases in oil prices—may also cause vessel operating expenses to increase. In addition, a substantial portion of our vessel operating expenses, primarily crew wages, are in currencies other than the U.S. dollar (mainly in Euro), and any gain or loss we incur as a result of the U.S.
dollar fluctuating in value against these currencies is included in vessel operating expenses. As of December 31, 2011, approximately 42% of our outstanding accounts payable were denominated in currencies other than the U.S. dollar (mainly in Euro). We fund our managers with the amounts they will
need to pay our fleet’s vessel operating expenses. Under our time charter arrangements, we generally pay for vessel operating expenses. General and Administrative Expenses General and administrative expenses mainly include legal, accounting and advisory fees. We also incur additional general and administrative expenses as a public company. The primary components of general and administrative expenses will consist of the expenses associated with being a public
company, which include the preparation of disclosure documents, legal and accounting costs, investor relation costs, incremental director and officer liability insurance costs, director and executive compensation and costs related to compliance with the Sarbanes-Oxley Act of 2002. Management Fees Historically, while we were a privately owned company, we paid our managers—Costamare Shipping, CIEL and Shanghai Costamare (through payments to Costamare Shipping)—a daily management fee of $700 per vessel for their services. With effect from the consummation of our initial public offering
on November 4, 2010, we pay to our managers a daily management fee of $850 per vessel for their services. The total management fees paid by us to our managers during the 49
years ended December 31, 2009, 2010 and 2011 amounted to $12.2 million, $11.3 million and $15.4 million, respectively. Our current Group Management Agreement, as described in “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Management Agreement”, went into effect upon the consummation of our initial public offering. If this agreement had been in effect since January 1,
2010, we estimate that the aggregate amount of additional payments to the manager would have been approximately $2.0 million higher, and net income would have been $2.0 million lower in 2010, than the amount recorded with respect to our then existing management agreement. Amortization of Dry-docking and Special Survey Costs We follow the deferral method of accounting for special survey and dry-docking costs whereby actual costs incurred (mainly shipyard costs, paints and class renewal expenses) are deferred and amortized on a straight-line basis over the period through the date the next survey is scheduled to become
due. If a survey is performed prior to the scheduled date, the remaining unamortized balances are immediately written off. Unamortized balances of vessels that are sold are written off and included in the calculation of the resulting gain or loss in the period of the vessel’s sale. Depreciation We depreciate our containerships on a straight-line basis over their estimated remaining useful economic lives. For years prior to January 1, 2007, we estimated this to be 25 years. As of January 1, 2007, we determined the estimated useful lives of our containerships to be 30 years from their initial
delivery from the shipyard. This change was made to reflect our experience, market conditions and the current practice in the containership industry. Depreciation is based on cost, less the estimated scrap value of the vessels. As of December 31, 2011, one of our vessels with 3,876 TEU capacity, was fully
depreciated. Gain on Sale/Disposal of Vessels The gain or loss on the sale of a vessel is presented in a separate line item in our consolidated statements of income. In 2009, 2010 and 2011, we sold ten, four and six vessels, respectively, while the vessel Rena was determined to be a constructive total loss for insurance purposes in 2011. Foreign Exchange Gains / (Losses) Our functional currency is the U.S. dollar because our vessels operate in international shipping markets, and therefore transact business mainly in U.S. dollars. Our books of accounts are maintained in U.S. dollars. Transactions involving other currencies are converted into U.S. dollars using the
exchange rates in effect at the time of the transactions. The gain or loss derives from the different foreign currency exchange rates between the time that a cost is recorded in our books and the time that the cost is paid. At the balance sheet dates, monetary assets and liabilities, which are denominated in
other currencies, are translated into U.S. dollars at the year-end exchange rates. Resulting gains or losses are reflected as foreign exchange gains / (losses) in our consolidated statement of income. Other Income / (Expenses) Other expenses represent primarily non-recurring items that are not classified under the other categories of our consolidated income statement. Such expenses may, for instance, result from various potential claims against our company, or from payments we are effecting on behalf of charterers that
cannot meet their obligations. Interest Income, Interest and Finance Costs We incur interest expense on outstanding indebtedness under our existing credit facilities which we include in interest expense. We also incur financing and legal costs in connection with 50
establishing those facilities, which is included in our finance costs. Further, we earn interest on cash deposits in interest-bearing accounts and on interest-bearing securities, which we include in interest income. We will incur additional interest expense in the future on our outstanding borrowings and under
future borrowings. For a description of our existing credit facilities and our new committed term loan please read “Liquidity and Capital Resources—Credit Facilities”. Other Other primarily represents vessels’ hull and machinery and vessels’ guarantee claims recoveries and gains resulting from “free lubricants” agreements that we have entered into for our vessels with lubricant suppliers. Free lubricants agreements with lubricant suppliers provide for the initial supply of
lubricants at no charge to us upon the acquisition of a vessel. Following the initial supply at no charge, we are obliged under these agreements to purchase required lubricants for the vessel from the relevant supplier for a contracted period of time. If we terminate such an agreement before it expires we
have to pay the supplier for the initial lubricant fill cost. We amortize the initial lubricant fill benefit through the term of the agreement. Gains (Loss) on Derivative Instruments We enter into interest rate swap contracts to manage our exposure to fluctuations of interest rate risks associated with specific borrowings. All derivatives are recognized in the consolidated financial statements at their fair value. On the inception date of the derivative contract, we designate the
derivative as a hedge of a forecasted transaction or the variability of cash flow to be paid (“cash flow” hedge). Changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge are recorded in other comprehensive income until earnings are affected by the
forecasted transaction or the variability of cash flow and are then reported in earnings. Changes in the fair value of undesignated derivative instruments and the ineffective portion of designated derivative instruments are reported in earnings in the period in which those fair value changes have occurred.
As at December 31, 2011, we were engaged in 27 interest rate derivative instruments in order to partially hedge the exposure of interest rate fluctuations associated with our variable rate borrowings and at this date 27 out of 28 of these agreements met hedge accounting criteria and the effective portion
in change in their fair value is recognized in “Other Comprehensive Loss” in stockholders’ equity on our balance sheet. We recognize in our statement of income the change in fair value of the one interest rate swap that does not meet hedge accounting criteria. For a description of our existing interest
rate swaps, please read “Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risk”. Results of Operations Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 During the year ended December 31, 2011 and 2010, we had an average of 47.8 and 42.4 vessels, respectively, in our fleet. In the year ended December 31, 2011, we accepted delivery of ten secondhand vessels with an aggregate TEU capacity of 29,242, and we sold six vessels and the vessel Rena was
determined to be a constructive total loss for insurance purposes, with an aggregate TEU capacity of 13,836. In the year ended December 31, 2010, we acquired the vessel Hyundai Navarino and the secondhand vessels Karmen and Rena with an aggregate TEU capacity of 15,233, and we sold four vessels
with an aggregate TEU capacity of 10,766. In the year ended December 31, 2011 and 2010, our fleet ownership days totaled 17,437 and 15,488 days, respectively. Ownership days are the primary driver of voyage revenue and vessels operating expenses and represent the aggregate number of days in a
period during which each vessel in our fleet is owned. 51
Year ended December 31,
Change
Percentage
2010
2011
(Expressed in millions of U.S. dollars, except percentages) Voyage revenue
$
353.2
$
382.2
$
29.0
8.2
% Voyage expenses
(2.1
)
(4.2
)
2.1
100.0
% Voyage expenses—related parties
(0.4
)
(2.9
)
2.5
625.0
% Vessels operating expenses
(102.8
)
(110.4
)
7.6
7.4
% Charter agreement early termination fee
(9.5
)
—
(9.5
)
(100.0
%) General and administrative expenses
(1.2
)
(5.0
)
3.8
316.7
% Management fees—related parties
(11.3
)
(15.3
)
4.0
35.4
% Amortization of dry-docking and special survey costs
(8.5
)
(8.1
)
(0.4
)
(4.7
%) Depreciation
(70.9
)
(78.8
)
7.9
11.1
% Gain on sale/disposal of vessels
9.6
13.1
3.5
36.5
% Foreign exchange gains / (losses)
(0.3
)
0.1
0.4
133.3
% Interest income
1.5
0.5
(1.0
)
(66.7
%) Interest and finance costs
(71.9
)
(75.4
)
3.5
4.9
% Other
0.3
0.5
0.2
66.7
% Gain (loss) on derivative instruments
(4.5
)
(8.7
)
$
4.2
93.3
% Net Income
$
81.2
$
87.6
6.4
7.9
%
Fleet operational data
Year ended December 31,
Change
Percentage
2010
2011 Average number of vessels
42.4
47.8
5.4
12.7
% Ownership days
15,488
17,437
1,949
12.6
% Number of vessels under dry-docking
12
8
(4
)
— The Company reports its financial results in accordance with U.S. generally accepted accounting principles (GAAP). However, management believes that certain non-GAAP financial measures used in managing the business may provide users of these financial measures additional meaningful
comparisons between current results and results in prior operating periods. Management believes that these non-GAAP financial measures can provide additional meaningful reflection of underlying trends of the business because they provide a comparison of historical information that excludes certain
items that impact the overall comparability. Management also uses these non-GAAP financial measures in making financial, operating and planning decisions and in evaluating the Company’s performance. The table below sets out our Voyage revenue adjusted on a cash basis and the corresponding
reconciliation to Voyage revenue for the twelve-month periods ended December 31, 2011 and December 31, 2010. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company’s reported results prepared in accordance with GAAP.
Year ended December 31,
Change
Percentage
2010
2011
(Expressed in millions of U.S. dollars, except percentages) Voyage revenue
$
353.2
$
382.2
$
29.0
8.2
% Accrued charter revenue(1)
(13.6
)
30.3
43.9
(222.9
%) Voyage revenue adjusted on a cash basis(2)
339.6
412.5
72.9
21.5
%
(1)
Accrued charter revenue represents the difference between cash received during the period and revenue recognized on a straight-line basis. (2) Voyage revenue adjusted on a cash basis represents Voyage revenue after cash changes in “Accrued charter revenue” deriving from escalating charter rates under which certain of our vessels operate. However, Voyage revenue adjusted on a cash basis is not a recognized measurement under U.S.
generally accepted accounting principles, or “GAAP.” We believe that the presentation of Voyage revenue adjusted on a cash basis is useful to investors because it presents the charter revenue for the relevant period based on the then current daily charter rates. The increases or decreases in daily
charter rates under our charter party agreements are described in the notes to the table in “Item 4. Information On The Company—Business Overview—Our Fleet, Acquisitions and Newbuild Vessels”. 52
Change
Change
Change
Voyage Revenue Voyage revenue increased by 8.2%, or $29.0 million, to $382.2 million during the year ended December 31, 2011, from $353.2 million during the year ended December 31, 2010. This increase was mainly due to increased average number of vessels in our fleet during the year ended December 31, 2011
compared to the year ended December 31, 2010. Voyage revenues adjusted on a cash basis, increased by 21.5%, or $72.9 million, to $412.5 million during the year ended December 31, 2011, from $339.6 million during the year ended December 31, 2010. The increase is attributable to the increased
ownership days of our fleet, as well as to the increased charter hire received in accordance with certain escalation clauses of our charters, during the year ended December 31, 2011 compared to the year ended December 31, 2010. Voyage Expenses Voyage expenses increased by 100.0%, or $2.1 million, to $4.2 million during the year ended December 31, 2011, from $2.1 million during the year ended December 31, 2010. The increase was primarily attributable to (a) the off-hire expenses, mainly due to bunkers consumption, of the eight out of
ten container vessels which were delivered to us by their sellers in the year ended December 31, 2011 and the five out of seven vessels sold in year ended December 31, 2011, and (b) the third party commissions charged to us in the year ended December 31, 2011 compared to the year ended December
31, 2010. Voyage Expenses—Related Parties Voyage expenses—related parties in the amount of $2.9 million during the year ended December 31, 2011 and in the amount of $0.4 million during the year ended December 31, 2010 represent fees of 0.75% on voyage revenues charged to us by Costamare Shipping Company S.A. as provided under
our Group Management Agreement, which became effective on November 4, 2010 (Initial Public Offering completion date). Vessels’ Operating Expenses Vessels’ operating expenses, which also include the realized gain (loss) under derivative contracts entered into in relation to foreign currency exposure, increased by 7.4%, or $7.6 million, to $110.4 million during the year ended December 31, 2011, from $102.8 million during the year ended December
31, 2010. The increase is attributable to the increase of 12.6% of the ownership days of our fleet partly offset by more efficient logistics achieved in the year ended December 31, 2011 compared to the year ended December 31, 2010. General and Administrative Expenses General and administrative expenses increased by 316.7%, or $3.8 million, to $5.0 million during the year ended December 31, 2011, from $1.2 million during the year ended December 31, 2010. The increase in the year ended December 31, 2011 was mainly attributable to increased public-company
related expenses charged to us (i.e. legal, audit and Directors and Officers insurance) subsequent to the completion of our Initial Public Offering on November 4, 2010, compared to the year ended December 31, 2010. Furthermore, General and administrative expenses for the year ended December 31,
2011 include $1.0 million compared to $0.16 million for the year ended December 31, 2010, for the services of the Company’s officers in aggregate charged to us by Costamare Shipping Company S.A. as provided under our Group Management Agreement signed on November 3, 2010. Management Fees Management fees paid to our managers increased by 35.4%, or $4.0 million, to $15.3 million during the year ended December 31, 2011, from $11.3 million during the year ended December 31, 2010. The increase was attributable to the daily management fee charged by our managers 53
subsequent to the completion of our Initial Public Offering on November 4, 2010 and to the increased fleet ownership days for the year ended December 31, 2011, compared to the year ended December 31, 2010. Amortization of Dry-docking and Special Survey Costs Amortization of deferred dry-docking and special survey costs decreased by 4.7% or $0.4 million, to $8.1 million during the year ended December 31, 2011, from $8.5 million during the year ended December 31, 2010. The decrease is mainly attributable to the amortization expense not charged
relating to the vessels sold during the year as their unamortized dry-docking balance at the date they were sold, was written-off and was included in the sale result; partly offset by the amortization expense charged for the vessels that were dry-docked during the year. During the year ended December 31,
2011, eight vessels underwent special survey. During the year ended December 31, 2010, twelve vessels underwent special survey. Depreciation Depreciation expense increased by 11.1%, or $7.9 million, to $78.8 million during the year ended December 31, 2011, from $70.9 million during the year ended December 31, 2010. The increase was primarily attributable to the depreciation expense charged for the two container vessels that were
delivered to us in November 2010 and to the ten container vessels that were delivered to us during the year ended December 31, 2011. Gain on Sale/Disposal of Vessels During the year ended December 31, 2011, we recorded, on a net basis, a gain of $13.1 million from the sale of six vessels and the constructive total loss of the vessel Rena, which includes the effects of a provision recorded for potential costs associated with the grounding of the Rena. During the
year ended December 31, 2010, we recorded a gain of $9.6 million from the sale of four vessels. Charter Agreement Early Termination Fee The charter agreement early termination fee of $9.5 million represents a one-time payment made to the charterer of MSC Navarino (renamed to Hyundai Navarino in January 2011) in December 2010, compensating the charterer MSC for the early termination of the charter party agreement of MSC
Navarino. The vessel was redelivered to us by the charterer on January 28, 2011 and on January 30, 2011 she was delivered to charterers HMM for a daily charter rate of $44,000, compared to a daily charter rate of $22,000 under the MSC charter party agreement. Foreign Exchange Gains / (Losses) Foreign exchange gains/(losses) were gains of $0.1 million during the year ended December 31, 2011, compared to losses of $0.3 million during the year ended December 31, 2010, representing a change of $0.4 million resulted from favorable currency exchange rate movements between the U.S. dollar
and the Euro. Interest Income During the year ended December 31, 2011, interest income decreased by 66.7%, or $1.0 million, to $0.5 million, from $1.5 million during the year ended December 31, 2010. The change in interest income was mainly due to the decreased interest rates on our cash deposits in interest bearing accounts
during the year ended December 31, 2011 compared to the year ended December 31, 2010. Interest and Finance Costs Interest and finance costs increased by 4.9%, or $3.5 million, to $75.4 million during the year ended December 31, 2011, from $71.9 million during the year ended December 31, 2010. The 54
increase is partly attributable to increased financing costs and commitment fees charged to us mainly in relation to new credit facilities we entered into with regards to our newbuilding program partly off-set by the capitalized interest in relation with our newbuilding program. Gain (Loss) on Derivative Instruments The fair value of our 28 derivative instruments which were outstanding as of December 31, 2011 equates to the amount that would be paid by us or to us should those instruments be terminated. As of December 31, 2011, the fair value of these 28 interest rate swaps in aggregate amounted to a
liability of $170.7 million. Twenty-seven of the 28 interest rate derivative instruments that were outstanding as at December 31, 2011, qualified for hedge accounting and the effective portion in the change of their fair value is recorded in “Comprehensive loss”. For the year ended December 31, 2011, a
loss of $55.5 million has been included in “Comprehensive loss” and a loss of $7.3 million has been included in “Gain (loss) on derivative instruments” in the consolidated statement of income, resulting from the fair market value change of the interest rate swaps during the year ended December 31, 2011. Year Ended December 31, 2010 Compared to Year Ended December 31, 2009 During the year ended December 31, 2010, we had an average of 42.4 vessels in our fleet, compared to an average of 47.3 vessels in our fleet during 2009. In 2010, we acquired the newbuild vessel MSC Navarino (renamed Hyundai Navarino in January 2011) and the secondhand vessels Karmen and
Rena with an aggregate TEU capacity of 15,233, and we sold four vessels with an aggregate TEU capacity of 10,766. In 2009, we acquired the vessels Gifted and Genius with an aggregate TEU capacity of 5,844, and we sold 10 vessels with an aggregate TEU capacity of 18,333. In 2009 and 2010, we had a
total of 17,279 and 15,488 fleet operating days, respectively. Operating days are the primary driver of voyage revenue and vessels’ operating expenses and represent the aggregate number of days in a period during which each vessel in our fleet is owned.
Year ended December 31,
Change
Percentage
2009
2010
(Expressed in millions of U.S. dollars, except percentages) Voyage revenue
$
399.9
$
353.2
$
(46.7
)
(11.7
%) Voyage expenses
(3.1
)
(2.1
)
(1.0
)
(32.3
%) Voyage expenses—related parties
—
(0.4
)
0.4
— Vessels operating expenses
(114.6
)
(102.8
)
(11.8
)
(10.3
%) General and administrative expenses
(1.7
)
(1.2
)
(0.5
)
(29.4
%) Management fees—related parties
(12.2
)
(11.3
)
(0.9
)
(7.4
%) Amortization of dry-docking and special survey costs
(8.0
)
(8.5
)
0.5
6.3
% Depreciation
(71.1
)
(70.9
)
(0.2
)
(0.3
%) Gain on sale of vessels
2.9
9.6
6.7
231.0
% Charter agreement early termination fee
—
(9.5
)
9.5
— Foreign exchange gains / (losses)
(0.5
)
(0.3
)
(0.2
)
(40.0
%) Interest income
2.6
1.5
(1.1
)
(42.3
%) Interest and finance costs
(86.8
)
(71.9
)
(14.9
)
(17.2
%) Other
3.9
0.3
(3.6
)
(92.3
%) Gain (loss) on derivative instruments
5.6
(4.5
)
(10.1
)
(180.4
%) Net Income
$
116.9
$
81.2
$
(35.7
)
(30.5
%) Average number of vessels
47.3
42.4
(4.9
)
(10.4
) Operating days
17,279
15,488
(1,791
)
(10.4
) Number of vessels dry-docked
6
12
6
— The Company reports its financial results in accordance with U.S. generally accepted accounting principles (GAAP). However, management believes that certain non-GAAP financial measures used in managing the business may provide users of these financial measures additional meaningful
comparisons between current results and results in prior operating periods. Management believes 55
Change
that these non-GAAP financial measures can provide additional meaningful reflection of underlying trends of the business because they provide a comparison of historical information that excludes certain items that impact the overall comparability. Management also uses these non-GAAP financial
measures in making financial, operating and planning decisions and in evaluating the Company’s performance. The table below sets out our Voyage revenue adjusted on a cash basis and the corresponding reconciliation to Voyage revenue for the twelve-month periods ended December 31, 2010 and
December 31, 2009. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company’s reported results prepared in accordance with GAAP.
Year ended December 31,
Change
Percentage
2009
2010
(Expressed in millions of U.S. dollars, except percentages) Voyage revenue
$
399.9
$
353.2
$
(46.7
)
(11.7
%) Accrued charter revenue (1)
(22.4
)
(13.6
)
8.8
39.3
% Voyage revenue adjusted on a cash basis (2)
377.5
339.6
(37.9
)
(10.0
%)
(1)
Accrued charter revenue represents the difference between cash received during the period and revenue recognized on a straight-line basis. (2) Voyage revenue adjusted on a cash basis represents Voyage revenue after cash changes in “Accrued charter revenue” deriving from escalating charter rates under which certain of our vessels operate. However, Voyage revenue adjusted on a cash basis is not a recognized measurement under U.S.
generally accepted accounting principles, or “GAAP.” We believe that the presentation of Voyage revenue adjusted on a cash basis is useful to investors because it presents the charter revenue for the relevant period based on the then current daily charter rates. The increases or decreases in daily
charter rates under our charter party agreements are described in the notes to the table in “Item 4. Information On The Company—Business Overview—Our Fleet, Acquisitions and Newbuild Vessels”. Voyage Revenue Voyage revenue decreased by 11.7%, or $46.7 million, to $353.2 million during the year ended December 31, 2010, from $399.9 million during the year ended December 31, 2009. The decrease was primarily attributable to the decrease in operating days of our fleet during the year; resulting from the
lower average number of vessels in our fleet during the year ended December 31, 2010, compared to the year ended December 31, 2009. The decrease was also attributable to the time charter period extension for eight of our vessels for a four-year period commencing the earliest from 2014 at rates on
average lower than the existing charter rates. Voyage revenues adjusted on a cash basis, decreased by 10% or $37.9 million to $339.6 million during the year ended December 31, 2010 from $377.5 million during the year ended December 31, 2009. The decrease is attributable to the decreased ownership
days of our fleet, partly offset by the increased charter hire received in accordance with certain escalation clauses of our charters, during the year ended December 31, 2010 compared to the year ended December 31, 2009. Voyage Expenses Voyage expenses decreased by 32.3%, or $1.0 million, to $2.1 million during the year ended December 31, 2010 from $3.1 million during the year ended December 31, 2009. The decrease was primarily attributable to the decrease in operating days of our fleet for the year ended December 31, 2010,
resulting from the lower average number of vessels in our fleet during the year ended December 31, 2010, compared to the year ended December 31, 2009. The decrease was also attributable to decreased commissions charged by third parties as well as to lower fuel consumption during off-hire days. 56
Change
Voyage Expenses—related parties Voyage expenses—related parties in the amount of $0.4 million represent management fees charged to us by Costamare Shipping Company S.A. as provided under the Group Management Agreement, which became effective on November 4, 2010 (Initial Public Offering completion date). Voyage
Expenses—related parties represent a 0.75% charge on our voyage revenues for the period from November 4, 2010 to December 31, 2010. Vessels’ Operating Expenses Vessels’ operating expenses, which also include the realized gain (loss) under our forward transactions we entered into to hedge our Euro/USD exposure, decreased by 10.3%, or $11.8 million, to $102.8 million during the year ended December 31, 2010, from $114.6 million during the year ended
December 31, 2009. Vessels’ operating expenses, excluding the effect of the realized gain (loss) under our forward transactions, decreased by 15.5%, or $18.5 million, to $101.0 million during the year ended December 31, 2010, from $119.5 million during the year ended December 31, 2009. The decrease
was mainly attributable to the decreased fleet operating days during the year ended December 31, 2010 compared to the year ended December 31, 2009. General and Administrative Expenses General and administrative expenses decreased by 29.4%, or $0.5 million, to $1.2 million during the year ended December 31, 2010, from $1.7 million during the year ended December 31, 2009. The decrease in the year ended December 31, 2010, was mainly attributable to the decrease in legal,
accounting and advisory fees charged to us. In the year ended December 31, 2009, Shanghai Costamare Ship Management Co. Ltd. charged us the amount of $0.5 million for market analysis and research services. There was not such charge for the year ended December 31, 2010. Management Fees—related parties Management fees paid to our managers decreased by 7.4%, or $0.9 million, to $11.3 million during the year ended December 31, 2010, from $12.2 million during the year ended December 31, 2009. The decrease was attributable to the decrease in operating days of our fleet for the year ended
December 31, 2010, resulting from the lower average number of vessels in our fleet in the year ended December 31, 2010, compared to the year ended December 31, 2009, partly offset by the new daily management fee we pay to our managers since the completion of our Initial Public Offering on
November 4, 2010. Amortization of Dry-docking and Special Survey Costs Amortization of deferred dry-docking and special survey costs increased by 6.3%, or $0.5 million, to $8.5 million during the year ended December 31, 2010, from $8.0 million during the year ended December 31, 2009. During the year ended December 31, 2009 and 2010, six vessels and 12 vessels,
respectively, underwent their special survey. The increase is attributable to the amortization expense charged for 12 vessels that were dry-docked during the year ended December 31, 2010, partly offset by the amortization expense not charged relating to the vessels sold during the year as their
unamortized dry-docking balance at the date they were sold, was written-off and was included in the sale result. Depreciation Depreciation expense decreased by 0.3%, or $0.2 million, to $70.9 million during the year ended December 31, 2010, from $71.1 million during the year ended December 31, 2009. The decrease was attributable to the sale of 10 vessels and four vessels during the years ended December 31, 2009 and
December 31, 2010, respectively, partly offset by the depreciation expense charged for two vessels and three vessels acquired during the years ended December 31, 2009 and December 31, 2010, respectively. Seven out of 10 vessels and three out of four vessels sold in 2009 and 2010, respectively, were fully
depreciated as of the dates they were sold. 57
Gain on Sale of Vessels In the year ended December 31, 2010, we recorded a gain of $9.6 million from the sale of four vessels, while in the year ended December 31, 2009, we recorded a net gain of $2.9 million from the sale of 10 vessels. Charter agreement early termination fee The charter agreement early termination fee of $9.5 million represents a one-time payment made to charterer MSC in December 2010, compensating MSC for the early termination of the time charter of MSC Navarino (renamed Hyundai Navarino in January 2011). The vessel was redelivered to us
by the charterer on January 28, 2011 and on January 30, 2011 she was delivered to charterers HMM for a daily charter rate of $44,000, compared to a daily charter rate of $22,000 under the MSC time charter. Foreign Exchange Gains / (Losses) Foreign exchange losses were $0.3 million during the year ended December 31, 2010, compared to losses of $0.5 million during the year ended December 31, 2009, representing a change of $0.2 million resulting from favorable currency exchange movements between the U.S. dollar and the Euro. Interest Income In the year ended December 31, 2010, interest income decreased by 42.3%, or $1.1 million, to $1.5 million, from $2.6 million during the year ended December 31, 2009. The change in interest income was mainly due to the decreased average cash balance held by us during the year ended December
31, 2010, compared to the year ended December 31, 2009. Interest and Finance Costs Interest and finance costs decreased by 17.2%, or $14.9 million, to $71.9 million during the year ended December 31, 2010, from $86.8 million during the year ended December 31, 2009. The decrease was mainly attributable to lower average debt balance during the year ended December 31, 2010,
compared to year ended December 31, 2009. The interest expense decreased to $19.5 million during the year ended December 31, 2010, from $47.5 million during the year ended December 31, 2009, due to decreased base rates. The costs relating to our interest rate swap agreements increased to $51.8
million during the year ended December 31, 2010, from $34.6 million during the year ended December 31, 2009, due to the increased difference between market rates and fixed rates. Other Other decreased to $0.3 million during the year ended December 31, 2010, from $3.9 million during the year ended December 31, 2009. The decrease was primarily attributable to the decreased income resulting from our vessels’ hull and machinery as well as guarantee claims recoveries. Gain (Loss) on Derivative Instruments The fair value of our 11 derivative instruments which were outstanding, as of December 31, 2010, equates to the amount that would be paid by us or to us should those instruments be terminated. As of December 31, 2010, the fair value of these 11 interest rate swaps in aggregate amounted to a
liability of $107.9 million. Ten of the 11 interest rate derivative instruments that were outstanding, as at December 31, 2010, qualified for hedge accounting and the effective portion in the change of their fair value is recorded in “Other comprehensive loss” in stockholders’ equity. For the year ended
December 31, 2010, a loss of $21.9 million has been included in “Other comprehensive loss” in stockholders’ equity and a loss of $4.9 million has been included in “Gain (loss) on derivative instruments” in the consolidated statement of income, resulting from the fair market value change of the interest
rate swaps during the year ended December 31, 2010. 58
B. Liquidity and Capital Resources In the past, our principal sources of funds have been operating cash flows and long-term bank borrowings. Our principal uses of funds have been capital expenditures to establish, grow and maintain our fleet, comply with international shipping standards, environmental laws and regulations, fund
working capital requirements and pay dividends. In monitoring our working capital needs, we project our charter hire income and vessels’ maintenance and running expenses, as well as debt service obligations, and seek to maintain adequate cash reserves in order to address any budget overruns. Our primary short-term liquidity need is to fund our vessel operating expenses. Our long-term liquidity needs primarily relate to additional vessel acquisitions in the containership sectors and debt repayment. We anticipate that our primary sources of funds will be cash from operations and undrawn
borrowing capacity under our committed credit facilities, along with borrowings under new credit facilities that we intend to obtain from time to time in connection with vessel acquisitions. We believe that these sources of funds will be sufficient to meet our short-term and long-term liquidity needs,
including our agreements, subject to certain conditions, to acquire newbuild vessels, although there can be no assurance that we will be able to obtain future debt financing on terms acceptable to us. In addition, we filed a shelf registration statement on Form F-3 with the SEC on January 30, 2012, which
became effective on February 14, 2012. We may use this registration statement to issue up to $300.0 million in aggregate public offering price of additional common stock, preferred stock, debt securities, warrants, rights or units. As at December 31, 2011, we had total cash liquidity of $144.1 million, consisting of cash, cash equivalents and restricted cash. As at December 31, 2011, we had an aggregate of $1.4 billion of indebtedness outstanding under various credit agreements. As at the same date, we had $153.2 million of undrawn borrowing capacity comprising from $113.7 million under a loan facility concluded on October 6, 2011 and $39.5 million
under a term facility we concluded on November 19, 2010, which amount excludes $660.4 million of available borrowing capacity under four facilities committed to finance part of the pre-delivery and delivery installments of the construction of our ten newbuild vessels on order. See “—Credit Facilities”. As
at February 15, 2012, we had $132.2 million of undrawn borrowing capacity comprising from $113.7 million under a loan facility concluded on October 6, 2011 and $18.5 million under a term facility we concluded on November 19, 2010, which amount excludes up to $647.0 million of available borrowing
capacity under four facilities committed to finance part of the pre-delivery and delivery installments of the construction of our ten newbuild vessels on order. Furthermore, as of February 15, 2012, the vessels shown in the table below were free of debt. Several of these vessels have been identified to be
used as collateral in the loan facility concluded on October 6, 2011. Unencumbered Vessels in the water as of February 15, 2012
Vessel Name
Year
TEU HYUNDAI NAVARINO
2010
8,531 SEALAND MICHIGAN*
2000
6,648 MSC AUSTRIA*
1984
3,584 KARMEN*
1991
3,351 MARINA*
1992
3,351 KONSTANTINA*
1992
3,351 AKRITAS
1987
3,152 MSC CHALLENGER
1986
2,633 MSC REUNION*
1992
2,024 MSC NAMIBIA II*
1991
2,023 MSC SIERRA II*
1991
2,023 MSC PYLOS*
1991
2,020 PROSPER*
1996
1,504 ZAGORA*
1995
1,162 HORIZON
1991
1,068 59
Built
Capacity
*
Indicates vessels that have been identified to be used as collateral in the loan facility concluded on October 6, 2011.
We paid our first cash dividend since becoming a public company in November 2010 on February 4, 2011 in an amount of $0.25 per share. We have subsequently paid dividends of $0.25 per share on May 12, 2011, $0.25 per share on August 9, 2011, $0.27 per share on November 7, 2011 and $0.27 per
share on February 8, 2012. See “Item 8. Financial Information—Consolidated Statements and Other Financial Information—Dividend Policy”. In 2010, we did not declare any dividends. In 2009, we declared dividends from our retained earnings to our existing stockholders of $40.2 million, of which $30.2
million were paid in 2009 and $10.0 million were paid on January 14, 2010. In 2008, we declared and paid dividends from our retained earnings to our existing stockholders of $10.8 million. Furthermore, in 2008, in relation to our reorganization process we paid out distributions to our existing stockholders of $400.0 million ($269.0 million of which was paid in 2008 and $131.0 million in 2009). As discussed under “2008 Reorganization”, the $400.0 million in distributions were paid
pursuant to the MSA in connection with the sale by the Konstantakopoulos family of the shares or assets of 53 ship-owning companies to the Company or newly formed subsidiaries of the Company. No distributions were paid in the year ended December 31, 2010 or 2011. The dividends and distributions paid during the years ended December 31, 2008, 2009, 2010 and 2011, were funded in part by borrowings and in part by cash from operations. On a cumulative basis for the entire period, cash flow from operating activities exceeded the aggregate amount of dividends
and distributions. Working Capital Position We have historically financed our capital requirements with cash flow from operations, equity contributions from stockholders and long-term bank debt. Our main uses of funds have been capital expenditures for the acquisition of new vessels, expenditures incurred in connection with ensuring that our
vessels comply with international and regulatory standards, repayments of bank loans and payments of dividends. We will require capital to fund ongoing operations, the construction of our new vessels, the acquisition cost of any secondhand vessels we agree to acquire in the future and debt service.
Working capital, which is current assets minus current liabilities, including the current portion of long-term debt, was negative of $87.7 million at December 31, 2011 and positive of $26.4 million at December 31, 2010. We anticipate that internally generated cash flow will be sufficient to fund the operations of our fleet, including our working capital requirements. As of February 15, 2012, we have $132.2 million undrawn credit lines to finance future vessel acquisitions and up to $647.0 million available under four
credit facilities to finance part of the pre-delivery and delivery installments of the construction of our ten newbuild vessels on order. See “—Credit Facilities”. Cash Flows Years ended December 31, 2009, 2010 and 2011
Year ended December 31,
2009
2010
2011
(Expressed in millions of U.S.
dollars) Condensed cash flows Net Cash Provided by Operating Activities
$
161.9
$
128.0
$
195.2 Net Cash Provided by (Used in) Investing Activities
12.8
(23.9
)
(283.8
) Net Cash Provided by (Used in) Financing Activities
(252.7
)
43.4
26.8 60
Net Cash Provided by Operating Activities Net cash flows provided by operating activities for the year ended December 31, 2011 increased by $67.2 million to $195.2 million, compared to $128.0 million for the year ended December 31, 2010. The increase was primarily attributable to (a) increased cash from operations of $72.9 million deriving
from increased ownership days, escalating charter rates and the cash contributed by the additional twelve vessels we acquired since November 2010, (b) favorable change in working capital position, excluding the current portion of long-term debt and the accrued charter revenue (representing the
difference between cash received in that period and revenue recognized on a straight-line basis) of $3.7 million and (c) decreased dry-docking payments of $6.6 million. Net cash flows provided by operating activities for 2010 decreased $33.9 million to $128.0 million, compared to $161.9 million for 2009. The decrease was primarily attributable to (a) decreased cash from operations of $38.0 million resulting from the decreased average number of vessels in 2010
compared to 2009 and to the increased “Accrued charter revenue” which results from the time difference between the revenue recognition and the cash collection, (b) unfavorable change in working capital position, excluding the current portion of long-term debt and the accrued charter revenue, of $7.8
million, (c) increased payments for dry-dockings of $6.7 million and (d) a one-time payment of $9.5 million in December 2010 to charterer MSC for the early redelivery of MSC Navarino (renamed Hyundai Navarino in January 2011), partly offset by reduced payments for interest (including swap
payments) of $16.9 million in the year ended December 31, 2010, compared to the year ended December 31, 2009. Net Cash Provided by (Used in) Investing Activities Net cash used in investing activities was $283.8 million in the year ended December 31, 2011, which consists of (a) $148.4 million advance payments and other capitalized costs for the construction and purchase of ten newbuild vessels, (b) $190.2 million in payments for the acquisition of ten
secondhand vessels, (c) $48.7 million net proceeds we received for the sale of six vessels and the constructive total loss of the vessel Rena and (d) $6.1 million we received from the sale of governmental bonds. Net cash used in investing activities in 2010 was $23.9 million, which consists of (a) $28.3 million in payments to the shipyard for the construction cost of MSC Navarino, (b) $22.5 million in payments for the acquisition of two vessels, (c) $3.8 million advance payments for the acquisition of four
vessels, (d) $22.7 million we received from the sale of four vessels and (e) $8.0 million we received from the sale of government securities. Net cash provided by investing activities in 2009 was $12.8 million, which consists of (a) $8.9 million in payments for the acquisition of the vessels Genius and Gifted, (b) $47.9 million in payments for the construction cost of MSC Navarino, (c) $21.4 million we received from the sale of government
securities and (d) $48.2 million we received from the sale of 10 vessels. Net Cash Provided by (Used in) Financing Activities Net cash provided by financing activities was $26.8 million in the year ended December 31, 2011, which mainly consists of (a) $124.6 million of indebtedness that we repaid, (b) $226.3 million we drew down from five of our credit facilities and (c) $61.5 million, in aggregate, we paid for dividends to
our stockholders for the fourth quarter of the year 2010, the first quarter of the year 2011, the second quarter of the year 2011 and the third quarter of the year 2011. Net cash provided by financing activities in 2010 was $43.4 million, which mainly consists of (a) $93.9 million of indebtedness that we repaid, (b) $10.0 million in dividends we paid to our shareholders and (c) $145.5 million net proceeds we received from our Initial Public Offering in November 2010. Net cash used in financing activities in 2009 was $252.7 million, which mainly consists of $30.0 million of proceeds drawn under our loan facility, $124.4 million of indebtedness that we repaid and $161.2 million in dividends we paid to our shareholders. 61
Credit Facilities We operate in a capital-intensive industry, which requires significant amounts of investment, and we fund a portion of this investment through long-term bank debt. We, either as guarantor or direct borrower, and certain of our subsidiaries as borrowers or guarantors, have entered into a number of
credit facilities in order to finance the acquisition of the vessels owned by our subsidiaries and for general corporate purposes. The obligations under our credit facilities are secured by, among other things, first priority mortgages over the vessels owned by the respective borrower subsidiaries, charter
assignments, first priority assignments of all insurances and earnings of the mortgaged vessels and guarantees by Costamare Inc. The following summarizes certain terms of our existing credit facilities discussed below as at December 31, 2011:
Lender
Outstanding
Available
Interest Rate(1)
Maturity
Repayment profile
(in thousands) CEXIM - DnB
0
203,343
LIBOR + Margin(2)
2021
(3)
Straight line amortization with
balloon DnB - ING
22,920
206,280
LIBOR + Margin(2)
2020
Straight line amortization with
balloon DnB - MEGA
15,280
137,520
LIBOR + Margin(2)
2020
Straight line amortization with
balloon ING
26,740
(6)
113,260
(6)
LIBOR + Margin(2)
2020
Straight line amortization with
balloon RBS(4)
79,538
(7)
39,500
(7)
LIBOR + Margin(2)
2020
(4)
Straight line amortization with
balloon(4) Bank Syndicate(5)
857,055
0
LIBOR + Margin(2)
2018
Straight line amortization with
balloon Emporiki
118,500
0
LIBOR + Margin(2)
2018
Straight line amortization with
balloon in 2018 Unicredit
0
113,700
LIBOR + Margin(2)
2018
Variable installments with balloon
in 2018 HSBC
62,250
0
LIBOR + Margin(2)
2018
Variable installments with balloon
in 2018 Calyon
65,000
0
LIBOR + Margin(2)
2018
Straight line amortization with
balloon in 2018 RBS
62,500
0
LIBOR + Margin(2)
2018
Straight line amortization with
balloon in 2018 Alpha
114,000
0
LIBOR + Margin(2)
2017
Variable installments with balloon
in 2017 Calyon
3,500
0
LIBOR + Margin(2)
2013
Fixed payments until 2013 Calyon
5,700
0
LIBOR + Margin(2)
2013
Fixed payments until 2013 NBG
10,437
0
LIBOR + Margin(2)
2012
Fixed payments until 2012
(1)
The interest rates of long—term debt at December 31, 2011 ranged from 1.21% to 6.75%, and the weighted average interest rate as at December 31, 2011 was 4.80%. (2) The interest rate margin at December 31, 2011 ranged from 0.7% to 2.5%, and the weighted average interest rate margin as at December 31, 2011, was 1.23%. (3) Maturity under this facility assumes exercise of the lenders early repayment option. Should this option not be exercised, the maturity will be 2024. (4) Borrowings under this facility may be made during the 18 months following our November 2010 initial public offering. The year 2020 represents the latest possible maturity under the facility. The actual maturity, repayment profile and balloon payment will be determined based on the age of the vessels
securing borrowings under this facility. (5) Bank Syndicate: Deutsche Schiffsbank Aktiengesellschaft, Unicredit Bank AG, Credit Suisse, HSH Nordbank AG and BNP—Paribas S.A. (ex. Fortis Bank S.A./N.V.). 62
Principal
Amount
Borrowing
Capacity
(6) On January 31, 2012, we drew $6.7 million for the financing of the second pre-delivery installment of hull no S4010. On February 8, 2012, we drew $6.7 million for the financing of the second pre-delivery installment of hull no S4011. (7) On February 7, 2012, we drew $21.0 million for the financing of the purchase of the MSC Ulsan. The principal financial and other covenants and events of default under each credit facility are also discussed below. CEXIM-Adele On January 14, 2011, our subsidiaries, Adele Shipping Co., Bastian Shipping Co., and Cadence Shipping Co., as borrowers, entered into a ten-year loan, which also provides for a Lenders’ early repayment option in year seven, for up to $203.3 million, with The Export-Import Bank of China, DnB
NOR Bank ASA, and China Everbright Bank, which we refer to in this section as the “CEXIM—Adele credit facility”. The purpose of this facility was to finance part of the acquisition and construction cost of Hulls H 1068A, H 1069A, and H 1070A, and the facility is divided into three tranches, one for
each newbuild vessel. The interest rate under the CEXIM—Adele credit facility is LIBOR plus an agreed margin. The credit facility provides that the borrowers must repay the loan by forty consecutive quarterly installments, the first thirty-nine (1-39) in the amount of $1.4 million per tranche each, commencing at the time
of delivery of Hulls H1068A, H1069A and H 1070A, and the amount of the fortieth installment shall be $12.7 million per tranche. The obligations under the CEXIM—Adele credit facility are guaranteed by Costamare Inc. and are secured by assignment of refund guarantees and shipbuilding contracts, a first priority mortgage over the vessels upon delivery, charter assignments, account assignments, master agreement assignment and
general assignments of earnings, insurances and requisition compensation. As of February 15, 2012, we had not drawn any amounts under the CEXIM—Adele credit facility. DnB-Quentin On August 16, 2011, our subsidiaries, Quentin Shipping Co., Undine Shipping Co., and Sander Shipping Co., as borrowers, entered into a seven-year loan for up to $ 229.2 million, with DnB NOR Bank ASA, ING Bank, ABN Amro Bank and Bank of America N.A., which we refer to in this section
as the “DnB—Quentin credit facility”. The purpose of this facility was to finance part of the acquisition and construction cost of Hulls S4020, S4022 and S4024, and the facility is divided into three tranches, one for each newbuild vessel. The interest rate under the DnB Quentin credit facility is LIBOR plus an agreed margin. The credit facility provides that the borrowers must repay the loan by twenty eight consecutive quarterly installments, the first twenty seven (1-27) in the amount of $1.3 million per tranche each, commencing at
the time of delivery of Hulls S4020, S4022 and S4024, and the amount of the twenty eighth installment shall be $42.0 million per tranche. The obligations under the DnB—Quentin credit facility are guaranteed by Costamare Inc. and are secured by assignment of refund guarantees and shipbuilding contracts, a first priority mortgage over the vessels upon delivery, charter assignments, account assignments, master agreement assignment and
general assignments of earnings, insurances and requisition compensation. As of February 15, 2012, there was $22.9 million outstanding under the DnB—Quentin Facility, and, as of the same date there was $206.3 million of undrawn available credit. DnB-Raymond On October 12, 2011, our subsidiaries, Raymond Shipping Co. and Terramce Shipping Co., as borrowers, entered into a seven-year loan for up to $ 152.8 million, with DnB NOR Bank ASA, Mega International Commercial Bank Co., Ltd., Cathay United Bank, Chinatrust Commercial Bank, 63
Hua Nan Commercial Bank, Ltd. and Land Bank of Taiwan, which we refer to in this section as the “DnB—Raymond credit facility”. The purpose of this facility was to finance part of the acquisition and construction cost of Hulls S4021 and S4023, and the facility is divided into two tranches, one for each
newbuild vessel. The interest rate under the DnB Quentin credit facility is LIBOR plus an agreed margin. The credit facility provides that the borrowers must repay the loan by twenty eight consecutive quarterly installments, the first twenty seven (1-27) in the amount of $1.4 million per tranche each, commencing at
the time of delivery of Hulls S4021 and S4023, and the amount of the twenty eighth installment shall be $40.0 million per tranche. The obligations under the DnB—Raymond credit facility are guaranteed by Costamare Inc. and are secured by assignment of refund guarantees and shipbuilding contracts, a first priority mortgage over the vessels upon delivery, charter assignments, account assignments, master agreement assignment and
general assignments of earnings, insurances and requisition compensation. As of February 15, 2012, there was $15.3 million outstanding under the DnB-Quentin Facility, and, as of the same date there was $137.5 million of undrawn available credit. ING On April 7, 2011, Costamare Inc., as borrower, entered into an eight-year loan, for up to $140.0 million, with ING Bank N.V., London Branch, which we refer to in this section as the “ING credit facility”. The purpose of this facility was to finance part of the acquisition and construction cost of Hulls
S4010 and S4011, and the facility is divided into two tranches, one for each newbuild vessel. The interest rate under the ING credit facility is LIBOR plus an agreed margin. The credit facility provides that the borrower must repay the loan by 16 consecutive semiannual installments, the first fifteen (1-15) in the amount of 1/30 of the loan outstanding, commencing at the time of delivery of
Hulls S4010 and S4011, and the amount of the sixteenth and final installment shall be equal to 15/30 of the loan outstanding at the time of delivery of Hulls S 4010 and S 4011. The obligations under the ING credit facility are guaranteed by Jodie Shipping Co. and Kayley Shipping Co. Our obligations under the ING credit facility are secured by assignment of refund guarantees and shipbuilding contracts, a first priority mortgage over the vessels upon delivery, charter
assignments, account assignments, master agreement assignment and general assignments of earnings, insurances and requisition compensation. On February 15, 2012, there was $40.1 million outstanding under the ING credit facility, and, as of same date, there was $99.9 million of undrawn available credit. RBS On November 19, 2010, Costamare Inc., as borrower, entered into a $120.0 million term loan facility with The Royal Bank of Scotland plc (the “RBS credit facility”), which will be available for drawing for up to 18 months. The loan tranches will have maturities ranging from three to eight years. We have used the RBS credit facility to finance the acquisition of secondhand vessels and we may use the remaining available capacity to finance the acquisition of additional newbuild or secondhand vessels, but we are also permitted to use it to refinance existing containerships in our fleet. The obligations under the RBS credit facility will be guaranteed by the various owners of the mortgaged vessels. Our obligations under the RBS credit facility will be secured by mortgages over each financed vessel, account charges, charter assignments, swap assignment and general assignments of
earnings, insurances and requisition compensation. As of February 15, 2012, there was $99.5 million outstanding under the RBS credit facility, and, as of the same date there was $18.5 million of undrawn available credit. 64
Costamare On July 22, 2008, Costamare Inc., as borrower, entered into a ten-year, $1 billion credit facility comprised of a $700 million term loan facility and a $300 million revolving credit facility, which we refer to in this section as the “Costamare credit facility”. The purpose of the revolving credit facility was
to finance part of the acquisition costs of vessels to be acquired or part of the market value of vessels owned by our subsidiaries. The purpose of the term loan facility was to finance general corporate and working capital purposes. On June 22, 2010, we entered into the second supplemental agreement
with the lenders, which modified certain covenants (as detailed below). The interest rate under the Costamare credit facility is LIBOR plus an agreed margin. The Costamare credit facility provides for repayment by forty consecutive quarterly installments, the first four (1-4) in the amount of $6.5 million and the next eight (5-12) in the amount of $9 million. The final
twenty-eight (13-40) installments, and the balloon installment repayable together with the fortieth (40th) installment, are to be calculated by using a formula that takes into account the then outstanding amount of this facility and the TEU weighted age of the mortgaged vessels. Following the date of
payment of the 12th installment on June 30, 2011, the term loan facility and the revolving credit facility were combined, the final twenty-eight (13-40) installments were fixed in the amount of $22.5 million each and the balloon installment was fixed in the amount of $272.8 million. The obligations under the Costamare credit facility are guaranteed by the various owners of the mortgaged vessels. Our obligations under this credit facility are secured by mortgages over the vessels owned by our subsidiaries, who are the guarantors, and general assignments of earnings, insurances
and requisition compensation, account pledges, charter assignments and a master agreement assignment. As of February 15, 2012, there was $857.1 million outstanding under the Costamare credit facility, and, as of same date, there was no undrawn available credit. Emporiki-Costis On May 12, 2008, our subsidiaries, Christos Maritime Corporation and Costis Maritime Corporation, as joint and several borrowers, entered into a ten-year, $150 million credit facility with Emporiki Bank of Greece S.A., which we refer to in this section as the “Emporiki-Costis credit facility”. The
loan is divided into two tranches: a Tranche A loan in the amount of $75 million to Christos Maritime Corporation, and a Tranche B loan in the amount of $75 million to Costis Maritime Corporation. The purpose of this facility was to finance part of the market value of two vessels, the Sealand
Washington and the Sealand New York. The interest rate under the Emporiki-Costis credit facility is LIBOR plus an agreed margin. The Emporiki-Costis credit facility provides that our subsidiaries, jointly and severally, repay the loan by twenty consecutive semi-annual payments, the first nineteen (1-19) in the amount of $2.25 million for
each tranche, and a final twentieth (20th) installment in the amount of $2.25 million, together with a balloon payment in the amount $30 million for each tranche. The obligations under the Emporiki-Costis credit facility are guaranteed by Costamare Inc. and are secured by first-priority mortgages over the vessels Sealand Washington and Sealand New York, account pledges, general assignments of earnings, insurances and requisition compensation, and charter
assignments. As of February 15, 2012, there was $118.5 million outstanding under the Emporiki-Costis credit facility, and, as of same date, there was no undrawn available credit. Unicredit On October 6, 2011, Costamare Inc., as borrower, entered into a $120.0 million loan facility with Unicredit Bank AG, which we refer to in this section as the Unicredit credit facility. The facility will be available for drawing until September 30, 2012. The purpose of the facility is to partly finance the
aggregate market values of eleven of our existing containerships. 65
The interest rate under the Unicredit credit facility is LIBOR plus an agreed margin. The Unicredit credit facility provides that the available amount is reduced quarterly by $6.3 million during the availability period and thereafter, the loan will be repaid by twenty five consecutive quarterly payments,
the first twelve (1-12) in the amount of $3.5 million, the next twelve (13-24) in the amount of $1.25 million, and a final twenty fifth (25th) installment in the amount of $1.25 million, together with a balloon payment in the amount $36.6 million. Our obligations under the Unicredit credit facility will be secured by guarantees of the various owners of the mortgaged vessels, mortgages over each financed vessel, account charges, charter assignments, swap assignment and general assignments of earnings, insurances and requisition compensation. As of February 15, 2012, there was no amount outstanding under the Unicredit credit facility, and, as of the same date there was $113.7 million of undrawn available credit. HSBC-Mas On January 30, 2008, our subsidiary, Mas Shipping Co., as borrower, entered into a ten-year, $75 million credit facility with HSBC Bank, which we refer to in this section as the “HSBC-Mas credit facility”. The purpose of this facility was to finance part of the purchase price of a vessel, the Maersk
Kokura. The interest rate under the HSBC-Mas credit facility is LIBOR plus an agreed margin. The repayment terms provide for Mas Shipping Co. to pay HSBC by twenty consecutive semi-annual installments, the first two (1-2) such repayment installments each in the sum of $1 million, the following two
(3-4) such repayment installments each in the sum of $1.5 million, the following two (5-6) such repayment installments each in the sum of $2 million, the following four (7-10) such repayment installments each in the sum of $3.75 million, the following two (11-12) such repayment installments each in the
sum of $4 million, and the following eight (13-20) such repayment installments each in the sum of $4.13 million, plus a balloon payment payable together with the twentieth (20th) and final repayment installment in the sum of $10 million. The obligations under the HSBC-Mas credit facility are guaranteed by Costamare Inc. and are secured by a first priority mortgage over the vessel, Maersk Kokura, an account pledge, a general assignment of earnings, insurances, requisition compensation and charter rights. As of February 15, 2012, there was $54.8 million outstanding under the HSBC-Mas credit facility, and, as of same date, there was no undrawn available credit. Calyon-Capetanissa On June 29, 2006, our subsidiary, Capetanissa Maritime Corporation, as borrower, entered into a twelve-year, $90 million credit facility with Calyon, which we refer to in this section as the “Calyon-Capetanissa credit facility”. The purpose of this facility was to finance part of the acquisition and
collateral cost of a vessel, the Cosco Beijing. The interest rate under the Calyon-Capetanissa credit facility is LIBOR plus an agreed margin. The Calyon-Capetanissa credit facility provides that Capetanissa Maritime Corporation must repay the loan by twenty-three consecutive semi-annual installments in the amount of $2.5 million, and a final
twenty-fourth installment in the amount of $32.5 million. The obligations under the Calyon-Capetanissa credit facility are guaranteed by Costamare Inc. and are secured by a first-priority mortgage over the vessel, Cosco Beijing, an account pledge, and a general assignment of earnings, insurances, requisition compensation and charter rights. As of February 15, 2012, there was $65.0 million outstanding under the Calyon-Capetanissa credit facility, and, as of same date, there was no undrawn available credit. 66
RBS-Rena On February 17, 2006, our subsidiary, Rena Maritime Corporation, as borrower, entered into a twelve-year, $90 million credit facility with The Royal Bank of Scotland plc, which we refer to in this section as the “RBS-Rena credit facility”. The purpose of this facility was to finance part of the
purchase price of a vessel, the Cosco Guangzhou, at a contract price of $90.8 million. The interest rate under the RBS Rena credit facility is LIBOR plus an agreed margin. The RBS-Rena credit facility provides for twenty-four (24) consecutive semi-annual installments in the amount of $2.5 million each, plus a balloon payment of $30 million together with the twenty-fourth (24th)
consecutive installment. The obligations under the RBS-Rena credit facility are guaranteed by Costamare Inc. and are secured by a first priority mortgage over the vessel Cosco Guangzhou, an account charge and a general assignment of our earnings, insurances and requisition compensation of the vessel. As of February 15, 2012, there was $62.5 million outstanding under the RBS-Rena credit facility, and, as of same date, there was no undrawn available credit. Alpha-Montes On December 7, 2007, our subsidiaries, Montes Shipping Co. and Kelsen Shipping Co., as joint and several borrowers, entered into a ten-year, $150 million credit facility with Alpha Bank A.E., which we refer to in this section as the “Alpha-Montes credit facility”. The loan is divided into two
tranches: Tranche A in the amount of $75 million to Montes Shipping Co., and Tranche B in the amount of $75 million to Kelsen Shipping Co. The purpose of this facility was to finance part of the acquisition costs of two vessels, the Maersk Kawasaki and the Maersk Kure. The interest rate under the Alpha-Montes credit facility is LIBOR plus an agreed margin. The Alpha-Montes credit facility provides that our subsidiaries must repay the loan, jointly and severally, by twenty consecutive semi-annual payments, the first six (1-6) in the amount of $4 million each, the
next thirteen (7-19) in the amount of $6 million each, and the twentieth (20th) installment comprised of a $6 million payment together with a balloon payment in the amount of $42 million. The obligations under the Alpha-Montes credit facility are guaranteed by Costamare Inc. and are secured by first priority mortgages over the vessels, the Maersk Kawasaki and the Maersk Kure, general assignments of earnings, insurances, requisition compensation, and charter assignments. As of February 15, 2012, there was $114.0 million outstanding under Tranche A and Tranche B in aggregate, of the Alpha-Montes credit facility, and, as of same date, there was no undrawn available credit. Calyon-Bullow On February 17, 2005, our subsidiary, Bullow Investments Inc., as borrower, entered into an eight-year, $31 million credit facility with Calyon, which we refer to in this section as the “Calyon-Bullow credit facility”. The purpose of this facility was to finance part of the acquisition cost of a previously
acquired vessel, the MSC Mykonos. The interest rate under the Calyon-Bullow credit facility is LIBOR plus an agreed margin. The credit facility provides that Bullow Investments Inc. must repay the loan by sixteen consecutive semi-annual installments, the first six (1-6) in the amount of $2.5 million each, the next four (7-10) in the
amount of $2 million each, the next four (11-14) in the amount of $1.5 million, and the final two (15-16) in the amount of $1 million. The obligations under the Calyon-Bullow credit facility are guaranteed by Costamare Inc. and are secured by a first priority mortgage over the vessel, MSC Mykonos, an account pledge and a general assignment of earnings, insurances and requisition compensation. As of February 15, 2012, there was $3.5 million outstanding under the Calyon-Bullow credit facility, and, as of same date, there was no undrawn available credit. 67
Calyon-Marathos On June 29, 2006, our subsidiary, Marathos Shipping Inc., as borrower, entered into a seven-year, $24.8 million credit facility with Calyon, which we refer to in this section as the “Calyon-Marathos credit facility”. The purpose of this facility was to finance part of the acquisition and collateral cost of a
vessel, the MSC Mandraki. The interest rate under the Calyon-Marathos credit facility is LIBOR plus an agreed margin. The repayment period began on February 22, 2007 and consists of thirteen consecutive semi-annual repayment installments in the amount of $2 million for the first (1st) repayment installment and $1.9
million each for the final twelve (2-13) repayment installments. The obligations under the Calyon-Marathos credit facility are guaranteed by Costamare Inc. and are secured by a first-priority mortgage over the vessel, MSC Mandraki, an account pledge, a general assignment of earnings, insurances, requisition compensation and charter rights. As of February 15, 2012, there was $5.7 million outstanding under the Calyon-Marathos credit facility, and, as of same date, there was no undrawn available credit. National Bank-Venor On December 11, 2009, our subsidiaries, Merin Shipping Co., Lytton Shipping Co., Volk Shipping Co. and Venor Shipping Co., as joint and several borrowers, entered into a three-year, $30 million credit facility with the National Bank of Greece, which we refer to in this section as the “National
Bank-Venor credit facility”. The purpose of this facility is to provide finances for general corporate purposes of the borrowing subsidiaries. The interest rate under the National Bank-Venor credit facility is LIBOR plus an agreed margin. The subsidiaries will repay the National Bank of Greece by six consecutive semi-annual installments in the amount of $3.8 million each, plus a balloon installment in the amount of $1.4 million together
with the second (2nd) consecutive installment, and a second balloon installment of $5.74 million together with the sixth (6th) consecutive installment on the third anniversary of the loan. On December 16, 2011, we repaid $2.92 million representing the loan outstanding on the vessel Garden, which was sold
for scrap. This repayment will be set off against the second balloon installment. The obligations under the National Bank-Venor credit facility are guaranteed by Costamare Inc. and are secured by a first priority mortgages over the vessels Genius I, Gather and Gifted, and general assignments of earnings, insurances and requisition compensation. As of February 15, 2012, there was $10.4 million outstanding under the National Bank-Venor credit facility, and, as of same date, there was no undrawn available credit. Covenants and Events of Default The credit facilities impose certain operating and financial restrictions on us. These restrictions in our existing credit facilities generally limit Costamare Inc., and our subsidiaries’ ability to, among other things:
•
pay dividends if an event of default has occurred and is continuing or would occur as a result of the payment of such dividends; • purchase or otherwise acquire for value any shares of the subsidiaries’ capital; • make or repay loans or advances, other than repayment of the credit facilities; • make investments in other persons; • sell or transfer significant assets, including any vessel or vessels mortgaged under the credit facilities, to any person, including Costamare Inc. and our subsidiaries; • create liens on assets; or • allow the Konstantakopoulos family’s direct or indirect holding in Costamare Inc. to fall below 40% of the total issued share capital. 68
Our existing credit facilities also require Costamare Inc. and certain of our subsidiaries to maintain specified loan to value ratios as summarized below:
•
under the credit facilities to which Costamare Inc. is the borrower, Costamare Inc. may not allow the aggregate of (a) the aggregate market value, primarily on a charter inclusive basis, of the mortgaged vessels under this facility and (b) the market value of any additional security provided to the
lender to fall below 125% of the aggregate of the loan amount and the swap exposure; provided, however that during a “waiver period” extending through December 31, 2011, Costamare Inc. was not permitted to allow the aggregate of (a), (b) and the aggregate minimum cash amount equal to 3%
of the loan outstanding to fall below 80% of the aggregate of the loan amount and the swap exposure; or • under certain of our credit facilities, we may not allow the aggregate of (a) the aggregate market value, primarily on an inclusive charter basis, of the mortgaged vessel or vessels, and (b) the market value of any additional security provided to the lender to fall below a percentage ranging between
110% to 125% of the then outstanding amount of the credit facility and any related swap exposure. • the minimum value covenant must be determined at the expense of the borrower at any such time as the lenders may request. Costamare Inc. is required to maintain compliance with the following financial covenants:
•
the ratio of our total liabilities (after deducting all cash and cash equivalents) to market value adjusted total assets (after deducting all cash and cash equivalents) may not exceed 0.75:1; • the ratio of EBITDA over net interest expense must be equal to or higher than 2.5:1; • the aggregate amount of all cash and cash equivalents may not be less than the greater of (i) $30 million or (ii) 3% of the total debt, provided, however, that under two of our credit facilities, a minimum cash amount equal to 3% of the loan outstanding must be maintained in accounts with the
lender; and • the market value adjusted net worth must at all times exceed $500 million. Our credit facilities contain customary events of default, including nonpayment of principal or interest, breach of covenants or material inaccuracy of representations, default under other indebtedness in excess of a threshold and bankruptcy. The Company is not in default under any of its credit facilities. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk The shipping industry is a capital intensive industry, requiring significant amounts of investment. Much of this investment is provided in the form of long-term debt. Our debt usually contains interest rates that fluctuate with the financial markets. Increasing interest rates could adversely impact future
earnings. Our interest expense is affected by changes in the general level of interest rates, particularly LIBOR. As an indication of the extent of our sensitivity to interest rate changes, an increase of 100 basis points would have decreased our net income and cash flows during the year ended December 31,
2011 by approximately $1.5 million based upon our debt level during 2011. For more information on our interest rate risk see “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risk”. Interest Rate Swaps We have entered into interest rate swap agreements converting floating interest rate exposure into fixed interest rates in order to economically hedge our exposure to fluctuations in prevailing market interest rates. For more information on our interest rate swap agreements, refer to Notes 2 and 15 to
our financial statements included at the end of this annual report. 69
Foreign Currency Exchange Risk We generate all of our revenue in U.S. dollars, but a substantial portion of our vessel operating expenses, primarily crew wages, are in currencies other than U.S. dollars (mainly in Euro), and any gain or loss we incur as a result of the U.S. dollar fluctuating in value against those currencies is
included in vessel operating expenses. As of December 31, 2011, approximately 42% of our outstanding accounts payable were denominated in currencies other than the U.S. dollar (mainly in Euro). We hold cash and cash equivalents mainly in U.S. dollars. As of December 31, 2011, the Company was engaged in 16 Euro/U.S. dollar contracts totaling $25.0 million at an average forward rate of Euro/U.S. dollar 1.3422 expiring in monthly intervals in 2012. As of December 31, 2010, the Company was engaged in 16 Euro/U.S. dollar contracts totaling $36.0 million at an average forward rate of Euro/U.S. dollar 1.3269 expiring in monthly intervals in 2011. As of December 31, 2009, the Company was engaged in six Euro/U.S. dollar contracts totaling $12.0 million at an average forward rate of Euro/U.S. dollar 1.4348 expiring in monthly intervals in 2010. We recognize these financial instruments on our balance sheet at their fair value. These foreign currency forward contracts do not qualify as hedging instruments, and thus we recognize changes in their fair value in our earnings. Capital Expenditures On September 21, 2010, we contracted for the construction and purchase of three newbuild vessels, which are scheduled to be delivered between November 2013 and January 2014. On January 28, 2011, we contracted for two additional newbuild vessels, which are scheduled to be delivered by the end
of 2012. On April 20, 2011, we contracted for the construction and purchase of five additional newbuild vessels, which are scheduled to be delivered within the first three quarters of 2013. The total aggregate price for all ten newbuild vessels, of approximately 89,000 TEU capacity in aggregate, is $953.7
million, payable in installments until delivery. As of February 15, 2012, we had outstanding commitments relating to our contracted newbuild vessels aggregating $791.5 million payable in installments until the vessels are delivered. In addition, dry-docking expenses totaled approximately $6.1 million in 2011, excluding off-hire costs. As of February 15, 2012, we had a total of undrawn credit lines of $132.2 million and 15 ships free of debt, 11 of which have been identified to be used as collateral in the loan facility concluded on October 6, 2011. Critical Accounting Policies The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of those financial statements requires us to make estimates and judgments that affect the
reported amounts of assets and liabilities, revenues and expenses and related disclosure at the date of our financial statements. Actual results may differ from these estimates under different assumptions and conditions. Critical accounting policies are those that reflect significant judgments of uncertainties
and potentially result in materially different results under different assumptions and conditions. We have described below what we believe are our most critical accounting policies, because they generally involve a comparatively higher degree of judgment in their application. For a description of all our
significant accounting policies, see Note 2 to our consolidated financial statements included elsewhere in this annual report. Vessel Impairment We evaluate the carrying amounts of our vessels to determine if events have occurred that would require modification to their carrying values or useful lives. In evaluating useful lives and carrying values of long-lived assets, we review certain indicators of potential impairment, such as 70
undiscounted projected operating cash flows, vessel sales and purchases, business plans and overall market conditions. The economic and market conditions as at December 31, 2010 and 2011, including the significant disruptions in the global credit markets in the prior years, had broad effects on participants in a wide variety of industries. 2011 saw increasing charter rates and asset prices during the first six months of
the year, along with further growth in vessel supply, followed by steep declines in both charter rates and vessel values during the latter half of the year, due to reduced transportation demand triggered by the unfolding sovereign debt crisis and overall financial volatility, conditions that we consider
indicators of impairment. In developing estimates of future undiscounted cash flows, we make assumptions and estimates about the vessels’ future performance, with the significant assumptions being related to time charter rates, vessels’ operating expenses, vessels’ capital expenditures, vessels’ residual value, fleet utilization,
and the estimated remaining useful life of each vessel. The assumptions used to develop estimates of future undiscounted cash flows are based on historical trends as well as future expectations and taking into consideration growth rates. We determine undiscounted projected net operating cash flows for each vessel and compare it to the vessel’s carrying value. Consistent with prior years and to the extent impairment indicators were present, the projected net operating cash flows are determined by considering the charter revenues
from existing time charters for the fixed fleet days and an estimated daily time charter rate for the unfixed days (based on the most recent ten year historical average rates, inflated annually by a 4.0% growth rate being the historical and forecasted average world GDP nominal growth rate) over the
remaining estimated life of the vessel assumed to be 30 years from the delivery of the vessel from the shipyard, expected outflows for vessels’ operating expenses assuming an annual inflation rate of 2.93% (in line with the average world Consumer Price Index forecasted), planned dry-docking and special
survey expenditures, management fees expenditures which are adjusted every year, after December 31, 2012 as provided under the Group Management Agreement, by an inflation rate of 4.0% and fleet utilization of 99.3% (excluding the scheduled off-hire days for planned dry-dockings and special surveys
which are determined separately ranging from 14 to 25 days depending on size and age of each vessel) based on historical experience. The salvage value used in the impairment test is estimated to be in the range from $150 to $250 per light weight ton in accordance with our vessels’ depreciation policy. Based on our analysis, the undiscounted projected net operating cash flows for each vessel were in excess compared to each vessel’s carrying value, and accordingly, step two of the impairment analysis was not required and no impairment of vessels existed as of December 31, 2010 and 2011. An internal analysis, which used a discounted cash flow model utilizing inputs and assumptions based on market observations as of December 31, 2011, suggests that seven of our 46 vessels in the water may have current market values below their carrying values. However, we believe that, with
respect to these seven vessels, each of which is currently under time charter, we will recover their carrying values through the end of their useful lives, based on their undiscounted cash flows. We currently do not expect to sell any of these vessels, or otherwise dispose of them, significantly before the end
of their estimated useful life. Although we believe that the assumptions used to evaluate potential impairment are reasonable and appropriate, such assumptions are highly subjective. There can be no assurance as to how long charter rates and vessel values will remain at their current low levels or whether they will improve by
any significant degree. Charter rates may remain at depressed levels for some time which could adversely affect our revenue and profitability, and future assessments of vessel impairment. While the Company intends to continue to hold and operate its vessels, the following table presents information with respect to the carrying amount of the Company’s vessels and indicates whether their estimated market values based on an internal discounted cash flow analysis are below their
carrying values as of December 31, 2011. The carrying value of each of the Company’s vessels does not necessarily represent its fair market value or the amount that could be obtained if the vessel were sold. The Company’s estimates of market values assume that the vessels are all in good and seaworthy
condition without need for repair and, if inspected, would be certified as being in 71
class without recommendations of any kind. In addition, because vessel values are highly volatile, these estimates may not be indicative of either the current or future prices that the Company could achieve if it were to sell any of the vessels. The Company would not record an impairment for any of the
vessels for which the fair market value is below its carrying value unless and until the Company either determines to sell the vessel for a loss or determines that the vessel’s carrying amount is not recoverable. The Company believes that the undiscounted projected net operating cash flows over the
estimated remaining useful lives for those vessels that have experienced declines in estimated market values below their carrying values exceed such vessels’ carrying values as of December 31, 2011, and accordingly has not recorded an impairment charge.
Vessel
Capacity
Built
Acquisition Date
Carrying Value 1
Cosco Hellas
9469
2006
July 2006
79.6 2
Cosco Guangzhou
9469
2006
February 2006
78.4 3
Cosco Beijing
9469
2006
June 2006
79.2 4
Cosco Yantian
9469
2006
April 2006
79.1 5
Cosco Ningbo
9469
2006
March 2006
78.5 6
MSC Navarino*
8531
2010
May 2010
116.0 7
Maersk Kure
7403
1996
December 2007
80.7 8
Maersk Kokura
7403
1997
February 2008
82.4 9
Maersk Kawasaki
7403
1997
December 2007
82,1 10
MSC Methoni
6724
2003
October 2011
59,5 11
Sealand Michigan
6648
2000
October 2000
41,8 12
Sealand Illinois
6648
2000
December 2000
42.0 13
Sealand NY
6648
2000
May 2000
40.5 14
Sealand Washington
6648
2000
August 2000
41.5 15
Maersk Kobe
6648
2000
June 2000
40.9 16
Maersk Kalamata
6644
2003
June 2003
50.3 17
Maersk Kingston
6644
2003
April 2003
50,2 18
Maersk Kolkata
6644
2003
January 2003
49.7 19
MSC Romanos
5050
2003
August 2011
54.2 20
Zim Shanghai
4992
2002
October 2002
36.4 21
Zim New York
4992
2002
September 2002
36.1 22
Zim Pireaus
4992
2004
May 2004
36.1 23
Halifax Express
4890
2000
November 2000
33.6 24
Oakland Express
4890
2000
October 2000
33.2 25
Singapore Express
4890
2000
August 2000
32.9 26
MSC Mykonos
4828
1988
January 2005
23.8 27
MSC Mandraki
4828
1988
October 2004
23,2 28
MSC Antwerp
3883
1993
December 1999
14.4 29
MSC Kyoto
3874
1981
May 2003
5.7 30
MSC Washington
3874
1984
September 1999
5.5 31
MSC Austria
3576
1984
March 1998
5.0 32
Karmen*
3351
1991
November 2010
12.4 33
Marina*
3351
1992
February 2011
10.9 34
Konstantina*
3351
1992
March 2011
10.7 35
Akritas
3152
1987
November 1997
5.9 36
Gather
2922
1984
December 2007
9.1 37
Genius I
2922
1984
September 2009
3.9 38
Gifted
2922
1984
August 2009
3.9 39
MSC Challenger
2633
1986
May 1998
5.2 40
MSC Reunion
2024
1992
March 2011
9.4 72
(TEU)
($ US Million)(1)
Vessel
Capacity
Built
Acquisition Date
Carrying Value 41
MSC Namibia II
2023
1991
March 2011
9.4 42
MSC Sierra II
2023
1991
March 2011
9.4 43
MSC Pylos
2020
1991
January 2011
7.5 44
Prosper *
1504
1996
March 2011
10.3 45
Zagora*
1162
1995
January 2011
7.9 46
Horizon*
1068
1991
February 2005
11.2
1,639.6
(1)
For impairment test calculation, Carrying Value includes the unamortized balance of dry-docking cost as at December 31, 2011. * Indicates container vessels which we believe, as of December 31, 2011, may have market values below their carrying values. The aggregate carrying value of these seven vessels was $179.3 million, while we believe that their market value was approximately $132.5 million. Vessels are stated at cost, which consists of the contract price and any material expenses incurred upon acquisition (initial repairs, improvements and delivery expenses, interest and on-site supervision costs incurred during the construction periods). Subsequent expenditures for conversions and major
improvements are also capitalized when they appreciably extend the life, increase the earning capacity or improve the efficiency or safety of the vessels. We depreciate our vessels based on a straight line basis over the expected useful life of each vessel, which is 30 years from the date of their initial delivery from the shipyard, which we believe is within industry standards and represents the most reasonable useful life for each of our vessels.
Depreciation is based on the cost of the vessel less its estimated residual value. Secondhand vessels are depreciated from the date of their acquisition through their remaining estimated useful lives. We review for impairment long-lived assets held and used whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In this respect, we review our fleet for impairment on a vessel by vessel basis. When the estimate of undiscounted projected
net operating cash flows, excluding interest charges, expected to be generated by the use of the vessel is less than its carrying amount, we evaluate the vessel for impairment loss. The impairment loss is determined by the difference between the carrying amount of the vessel and the fair value of the
vessel. If our estimate of undiscounted projected net operating cash flows for any vessel is lower than the vessel’s carrying value, the carrying value is written down, by recording an impairment loss to operations, to the vessel’s fair market value if the fair market value is lower than the vessel’s carrying
value. Vessel Lives and Depreciation We depreciate our vessels based on a straight line basis over the expected useful life of each vessel, which is 30 years from the date of their initial delivery from the shipyard, which we believe is within industry standards and represents the most reasonable useful life for each of our vessels.
Depreciation is based on the cost of the vessel less its estimated residual value. Secondhand vessels are depreciated from the date of their acquisition through their remaining estimated useful lives. A decrease in the useful life of a vessel or in its residual value would have the effect of increasing the
annual depreciation charge. When regulations place limitations over the ability of a vessel to trade on a worldwide basis, its useful life is adjusted to end at the date such regulations become effective. Special Survey and Dry-docking Costs Within the shipping industry, there are two methods that are used to account for special survey and dry-docking costs: (1) capitalize special survey and dry-docking costs as incurred (deferral method) and amortize such costs over the period to the next scheduled survey, and (2) expense special survey
and dry-docking costs as incurred. Since special survey and dry-docking cycles typically extend over a period of 30 to 60 months, management believes that the deferral method provides a better matching of revenues and expenses than the expense-as-incurred method. Costs 73
(TEU)
($ US Million)(1)
deferred are limited to actual costs incurred at the shipyard and parts used in the dry-docking or special survey. If a survey is performed prior to the scheduled date, the remaining unamortized balances are immediately written off. Unamortized balances of vessels that are sold are written off and included
in the calculation of the resulting gain or loss in the period of the vessel’s sale. Furthermore, unamortized dry-docking and special survey balances of vessels that are classified as assets held for sale and are not recoverable, as of the date of such classification, are immediately written off to the income
statement. Vessel, Cost Vessels are stated at cost, which consists of the contract price and any material expenses incurred upon acquisition (initial repairs, improvements and delivery expenses, interest and on-site supervision costs incurred during the construction periods). Subsequent expenditures for conversions and major
improvements are also capitalized when they appreciably extend the life, increase the earning capacity or improve the efficiency or safety of the vessels; otherwise these amounts are charged to expenses as incurred. Voyage Revenue Recognition Revenues are generated from time charters and are usually paid 15 days in advance. Time charters with the same charterer are accounted for as separate agreements according to the terms and conditions of each agreement. Time charter revenues over the term of the time charter are recorded as
service is provided, when they become fixed and determinable. Revenues from time charters providing for varying annual rates are accounted for as operating leases and thus recognized on a straight line basis as the average revenue over the rental periods of such agreements, as service is performed.
Some of our time charters provide that the charter rate will be adjusted to a market rate for the final months of their respective terms. For purposes of determining the straight line revenue amount, we exclude these periods and treat the charter as expiring at the end of the last fixed rate period. A
voyage is deemed to commence upon the completion of discharge of the vessel’s previous cargo and is deemed to end upon the completion of discharge of the current cargo, provided an agreed non-cancelable time charter between the Company and the charterer is in existence, the charter rate is fixed or
determinable and collectability is reasonably assured. Unearned revenue includes cash received prior to the balance sheet date for which all criteria to recognize as revenue have not been met, including any unearned revenue resulting from time charters providing for varying annual rates, which are
accounted for on a straight line basis. Unearned revenue also includes the unamortized balance of the liability associated with the acquisition of secondhand vessels with time charters attached that were acquired at values below fair market value at the date the acquisition agreement is consummated. Accrued / Unearned Charter Revenue We record identified assets or liabilities associated with the acquisition of a vessel at fair value, determined by reference to market data. The Company values any asset or liability arising from the market value of the time charters assumed when a vessel is acquired from entities that are not under
common control. This policy does not apply when a vessel is acquired from entities that are under common control. The amount to be recorded as an asset or liability at the date of vessel delivery is based on the difference between the current fair market value of the charter and the net present value of
future contractual cash flows. When the present value of the contractual cash flows of the time charter assumed is greater than its current fair value, the difference is recorded as accrued prepaid charter revenue. When the opposite situation occurs, any difference, capped to the vessel’s fair value on a
charter free basis, is recorded as deferred revenue. Such assets and liabilities, respectively, are amortized as a reduction of, or an increase in, revenue over the period of the time charter assumed. In developing estimates of the net present value of contractual cash flows of the time charters assumed, we
must make assumptions about the discount rate that reflect the risks associated with the assumed time charter and the fair value of the assumed time charter at the time the vessel is acquired. Although management believes that the assumptions used to evaluate present and fair values discussed above will
be reasonable and appropriate, such assumptions are highly subjective. 74
Receivables Revenue is based on contracted time charters and although our business is with customers who are believed to be of the highest standard, there is always the possibility of dispute. In such circumstances, we will assess the recoverability of amounts outstanding and a provision will be estimated if there
is a possibility of non-recoverability. Although we may believe that our provisions are based on fair judgment at the time of their creation, it is possible that an amount under dispute will not be recovered and the estimated provision of doubtful accounts would be inadequate. If any of our revenues
become uncollectible, these amounts would be written-off at that time. Derivative Financial Instruments We enter into interest rate swap contracts to manage our exposure to fluctuations of interest rate risks associated with specific borrowings. Interest rate differentials paid or received under these swap agreements are recognized as part of interest expense related to the hedged debt. All derivatives are
recognized in the consolidated financial statements at their fair value. On the inception date of the derivative contract, we designate the derivative as a hedge of a forecasted transaction or the variability of cash flow to be paid (“cash flow” hedge). Changes in the fair value of a derivative that is qualified,
designated and highly effective as a cash flow hedge are recorded in other comprehensive income until earnings are affected by the forecasted transaction or the variability of cash flow and are then reported in earnings. Changes in the fair value of undesignated derivative instruments and the ineffective
portion of designated derivative instruments are reported in earnings in the period in which those fair value changes have occurred. Realized gains or losses on early termination of the derivative instruments are also classified in earnings in the period of termination of the respective derivative instrument.
We may re-designate an undesignated hedge after its inception as a hedge but then will consider its non-zero value at re-designation in its assessment of effectiveness of the cash flow hedge. We formally document all relationships between hedging instruments and hedged terms, as well as the risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash flow hedges to specific forecasted
transactions or variability of cash flow. We also formally assess, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flow of hedged items. We consider a hedge to be highly effective if the change in fair value of the derivative
hedging instrument is within 80% to 125% of the opposite change in the fair value of the hedged item attributable to the hedged risk. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, we discontinue hedge accounting
prospectively, in accordance with ASC 815 “Derivatives and Hedging” (formerly FAS133). We also enter forward exchange rate contracts to manage our exposure to currency exchange risk on certain foreign currency liabilities. We have not designated these forward exchange rate contracts for hedge accounting. C. Research and Development, Patents and Licenses, etc. We incur from time to time expenditures relating to inspections for acquiring new vessels. Such expenditures are insignificant and they are expensed as they are incurred. D. Trend Information Our results of operations depend primarily on the charter hire rates that we are able to realize. In turn, charter hire rates are determined by the growth in demand for containership transportation services and the corresponding growth in the supply of containerships. Demand for containership
transportation services is influenced by global economic and financial conditions. During 2008 and 2009, the rapid contraction in the world economy and the expectation of declining growth across the world reduced demand for containership transportation services, while the industry was confronted with record supply growth. 2010, however, was a positive year for the containership
industry, with charter rates and asset values recovering on solid transportation demand. 75
2011 saw increasing charter rates and asset prices during the first 6 months of the year, along with further growth in vessel supply, followed by steep declines during the latter half, due to reduced transportation demand triggered by the unfolding sovereign debt crisis and overall volatile financial
conditions. The decline in demand for container shipping services has continued in the first two months of 2012, along with an excess supply of vessels. Sustained low transportation demand growth especially in the western world combined with increasing containership capacity (both current and expected) is likely to result in reductions in charter hire rates and, as a consequence, adversely affect our operating results. E. Off-Balance Sheet Arrangements As of December 31, 2011, we did not have any off-balance sheet arrangements. F. Tabular Disclosure of Capital Obligations Our contractual obligations as of December 31, 2011 were:
Payments Due by Period
Total
Less than
1-3 years
3-5 years
More than
(Expressed in thousands of U.S. dollars) Long-term debt obligations
$
1,443,420
$
153,176
$
331,406
$
284,569
$
674,269 Interest on long-term debt obligations(1)
273,093
64,554
103,372
67,357
37,810 Payments to our manager(2)
279,082
18,319
43,605
45,429
171,729 Payment for secondhand vessel acquisitions(3)
30,000
30,000
—
—
— Payments to shipyards(4)
810,609
305,215
505,394
—
— Total(5)
$
2,836,204
$
571,264
$
983,777
$
397,355
$
883,808
(1)
We expect to be obligated to make the interest payments set forth in the above table with respect to our long-term debt obligations. The interest payments are based on annual assumed all-in rates calculated for the un-hedged portion of our debt obligations based on the forward yield curve and on the
average yearly debt outstanding. Interest payments with respect to future drawdowns on our credit facilities to pay the remaining capital commitments for the ten newbuild vessels on order are not included in the above figures. (2) This amount assumes that we will cease paying our managers any fees in connection with the management of a vessel once the vessel exceeds 30 years of age, unless the vessel will exceed 30 years of age at the expiry of its current time charter, in which case we assume that we will pay the manager a
fee for the management of that vessel until its charter expires. The management fees include (a) a daily fee of $850 per day per vessel and (b) a 0.75% chartering fee on charter revenues earned. Pursuant to the terms of the Group Management Agreement, the amount assumes an annual escalation of
the daily fee by 4% beginning January 1, 2013. Management fees with regards to our ten newbuild vessels and the secondhand vessel to be delivered are also included in the above figures. (3) This represents the amount that was paid upon delivery of the vessel MSC Ulsan. (4) This amount represents the remaining capital commitments with regards to the ten newbuild vessels on order. (5) The above does not include the related newbuild vessel supervision fees payable to our manager. The supervision fee commitment will be $4.2 million in 2012, $2.45 million in 2013 and $0.35 million in 2014. See “Item 7. Major Shareholders and Related Party Transactions—Related Party
Transactions—Management Agreement”. 76
1 year
5 years
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. Directors and Senior Management The following table sets forth information regarding our directors and executive officers. The business address of each of our executive officers and directors listed below is 60 Zephyrou Street & Syngrou Avenue, 17564 Athens, Greece. Our telephone number at that address is +30-210-949-0050. Our
board of directors will be elected annually on a staggered basis, and each elected director will hold office for a three-year term. The following directors or nominees for director have been determined by our board of directors to be independent: Vagn Lehd Møller and Charlotte Stratos. Officers are elected
from time to time by vote of our board of directors and hold office until a successor is elected and qualified. Name
Age Position Konstantinos Konstantakopoulos
42 Chief Executive Officer, Chairman of the Board and Gregory Zikos
43 Chief Financial Officer and Class II Director Konstantinos Zacharatos
39 General Counsel, Secretary and Class I Director Vagn Lehd Møller
65 Class II Director Charlotte Stratos
57 Class III Director The term of our Class I director expires in 2014, the term of our Class II directors expires in 2012 and the term of our Class III directors expires in 2013. Konstantinos Konstantakopoulos is our Chief Executive Officer and Chairman of our board of directors. Mr. Konstantakopoulos serves as President and Chief Executive Officer of Costamare Shipping, one of our three managers, which he wholly owns and joined in 1992 (and where he worked part-
time beforehand). In 2001, Mr. Konstantakopoulos founded CIEL, one of our managers, and he has served as President of CIEL since its inception. Mr. Konstantakopoulos owns 50.2% of CIEL. In 2005, Mr. Konstantakopoulos founded another of our managers, Shanghai Costamare, of which he is the
controlling shareholder. Mr. Konstantakopoulos also owns, indirectly, 25% of C-Man Maritime, a vessel manning agency which he founded in 2006. Mr. Konstantakopoulos has served on the board of directors of the Union of Greek Ship-owners since 2006. Mr. Konstantakopoulos studied engineering at
Université Paul Sabatier in France. Gregory Zikos is our Chief Financial Officer and a member of our board of directors. Prior to joining us in 2007, Mr. Zikos was employed at DryShips, Inc., a public shipping company, as the Chief Financial Officer from 2006 to 2007. From 2004 to 2006, Mr. Zikos was employed with J&P Avax S.A.,
a real estate investment and construction company, where he was responsible for project and structured finance debt transactions. From 2000 to 2004, Mr. Zikos was employed at Citigroup (London), global corporate and investment banking group, where he was involved in numerous European leveraged
and acquisition debt financing transactions. Mr. Zikos practiced law from 1994 to 1998, during which time he advised financial institutions and shipping companies in debt and acquisition transactions. Mr. Zikos holds an M.B.A. in finance from Cornell University, an L.L.M. from the University of London
King’s College, and a bachelor of laws, with merits, from the University of Athens. Konstantinos Zacharatos is our General Counsel, Secretary and a member of our board of directors. Mr. Zacharatos has also served as the Vice Chairman of Shanghai Costamare since its incorporation in 2005. Mr. Zacharatos joined Costamare Shipping in 2000, became a member of the board of
directors of Costamare Shipping in June 2010 and has also been responsible for the legal affairs of CIEL, Shanghai Costamare and C-Man Maritime. Mr. Zacharatos has been the legal adviser of Costaterra S.A., a Greek property company, since 2000. Prior to joining Costamare Shipping and Costaterra
S.A., Mr. Zacharatos was employed with Pagoropoulos & Associates, a law firm. Mr. Zacharatos holds an L.L.M. and an L.L.B. from the London School of Economics and Political Science. Vagn Lehd Møller is a member of our board of directors. From 1963 to 2007, Mr. Møller worked with A.P. Møller-Maersk A/S where he eventually served as Executive Vice President and Chief Operations Officer of the world’s largest liner company, Maersk Line. Mr. Møller was 77
Class III Director
instrumental in the purchase and integration of Sea-land Services by A.P. Møller-Maersk A/S in 2000 and of P&O Nedlloyd in 2005. From 1992 to July 2010, Mr. Møller served as a board member for Norfolk Line Holdings, a Netherlands based sea ferry company. From 2000 to April 2010, Mr. Møller served
as a board member for Svitzer A/S, a Denmark based salvage and towing company. Charlotte Stratos is a member of our board of directors. Since 2008, Ms. Stratos has served as a Senior Advisor to Morgan Stanley’s Investment Banking Division-Global Transportation team. From 1987 to 2007, Ms. Stratos served as Managing Director and Head of Global Greek Shipping for Calyon
Corporate and Investment Bank of the Credit Agricole Group. From 1976 to 1987, Ms. Stratos served in various roles with Bankers Trust Company, including Advisor to the Shipping Department and Vice President of Greek shipping finance. Ms. Stratos currently serves as an independent director for
Hellenic Carriers Ltd. and Gyroscopic Fund, a hedge fund company. B. Compensation of Directors and Senior Management Non-executive directors receive annual fees in the amount of $65,000, plus reimbursement for their out-of-pocket expenses. Our officers who serve as our directors will not receive additional compensation for their service as directors. We have not paid any compensation to our chief executive officer, our chief financial officer or our general counsel. Our executive officers are provided to us by Costamare Shipping and their compensation is set and paid by Costamare Shipping. Under the Group Management Agreement with
Costamare Shipping, we are responsible for the compensation of our executive officers. Currently, such compensation is $1.0 million per year in the aggregate. We do not have any service contracts with our non-executive directors that provide for benefits upon termination of their services. C. Board Practices We have five members on our board of directors. The board of directors may change the number of directors to not less than three, nor more than 15, by a vote of a majority of the entire board. Each director shall be elected to serve until the third succeeding annual meeting of stockholders and
until his or her successor shall have been duly elected and qualified, except in the event of death, resignation or removal. A vacancy on the board created by death, resignation, removal (which may only be for cause), or failure of the stockholders to elect the entire class of directors to be elected at any
election of directors or for any other reason, may be filled only by an affirmative vote of a majority of the remaining directors then in office, even if less than a quorum, at any special meeting called for that purpose or at any regular meeting of the board of directors. We are a “foreign private issuer” under the securities laws of the United States and the rules of the NYSE. Under the securities laws of the United States, “foreign private issuers” are subject to different disclosure requirements than U.S. domiciled registrants, as well as different financial reporting
requirements. Under the NYSE rules, a “foreign private issuer” is subject to less stringent corporate governance requirements. Subject to certain exceptions, the rules of the NYSE permit a “foreign private issuer” to follow its home country practice in lieu of the listing requirements of the NYSE. In
addition, members of the Konstantakopoulos family own, in the aggregate, a majority of our outstanding common stock. As a result, we are a “controlled company” within the meaning of the NYSE corporate governance standards. Under the NYSE rules, a company of which more than 50% of the voting
power is held by another company or group is a “controlled company” and may elect not to comply with certain NYSE corporate governance requirements, including (1) the requirement that a majority of the board of directors consist of independent directors, (2) the requirement that the nominating
committee be composed entirely of independent directors and have a written charter addressing the committee’s purpose and responsibilities, (3) the requirement that the compensation committee be composed entirely of independent directors and have a written charter addressing the committee’s purpose
and responsibilities and (4) the requirement of an annual performance evaluation of the nominating and corporate governance and compensation committees. As permitted by these exemptions, as well as by our bylaws and the laws of the Marshall Islands, we currently have a board of directors with a
majority of non- independent directors and a combined 78
corporate governance, nominating and compensation committee with one non-independent director serving as a committee member. As a result, non-independent directors, including members of our management who also serve on our board of directors, may among other things, fix the compensation of
our management, make stock and option awards and resolve governance issues regarding our company. In addition, we currently have an audit committee composed solely of two independent committee members, whereas a domestic public company would be required to have three such independent
members. Accordingly, in the future you may not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements. Corporate Governance The board of directors and our Company’s management engage in an ongoing review of our corporate governance practices in order to oversee our compliance with the applicable corporate governance rules of the New York Stock Exchange and the SEC. We have adopted a number of key documents that are the foundation of the Company’s corporate governance, including:
•
a Code of Business Conduct and Ethics for all officers and employees, which incorporates a Code of Ethics for directors and a Code of Conduct for corporate officers; • a Corporate Governance, Nominating and Compensation Committee Charter; and • an Audit Committee Charter. These documents and other important information on our governance are posted on our website and may be viewed at http://www.costamare.com. We will also provide a paper copy of any of these documents upon the written request of a stockholder. Stockholders may direct their requests
to the attention of our Secretary, Konstantinos Zacharatos, 60 Zephyrou Street & Syngrou Avenue, 17564 Athens, Greece. Committees of the Board of Directors Audit Committee Our audit committee consists of Vagn Lehd Møller and Charlotte Stratos. Ms. Stratos is the chairman of the committee. The audit committee is responsible for:
•
the appointment, compensation, retention and oversight of independent auditors and approving any non-audit services performed by such auditor; • assisting the board in monitoring the integrity of our financial statements, the independent auditors’ qualifications and independence, the performance of the independent accountants and our internal audit function and our compliance with legal and regulatory requirements; • annually reviewing an independent auditors’ report describing the auditing firm’s internal quality-control procedures, and any material issues raised by the most recent internal quality control review, or peer review, of the auditing firm; • discussing the annual audited financial and quarterly statements with management and the independent auditors; • discussing earnings press releases, as well as financial information and earnings guidance provided to analysts and rating agencies; • discussing policies with respect to risk assessment and risk management; • meeting separately, and periodically, with management, internal auditors and the independent auditor; • reviewing with the independent auditor any audit problems or difficulties and management’s responses; • setting clear hiring policies for employees or former employees of the independent auditors; 79
• annually reviewing the adequacy of the audit committee’s written charter, the internal audit charter, the scope of the annual internal audit plan and the results of internal audits; • establishing procedures for the consideration of all related-party transactions, including matters involving potential conflicts of interest or potential usurpations of corporate opportunities; • reporting regularly to the full board of directors; and • handling such other matters that are specifically delegated to the audit committee by the board of directors from time to time. Corporate Governance, Nominating and Compensation Committee Our corporate governance, nominating and compensation committee consists of Konstantinos Konstantakopoulos, Vagn Lehd Møller and Charlotte Stratos. Mr. Konstantakopoulos is the chairman of the committee. The corporate governance, nominating and compensation committee is responsible for:
•
nominating candidates, consistent with criteria approved by the full board of directors, for the approval of the full board of directors to fill board vacancies as and when they arise, as well as putting in place plans for succession, in particular, of the chairman of the board of directors and executive
officers; • selecting, or recommending that the full board of directors select, the director nominees for the next annual meeting of shareholders; • developing and recommending to the full board of directors corporate governance guidelines applicable to us and keeping such guidelines under review; • overseeing the evaluation of the board and management; and • handling such other matters that are specifically delegated to the corporate governance, nominating and compensation committee by the board of directors from time to time. D. Employees Our manager provides us with our executive officers, our chairman and chief executive officer, Konstantinos Konstantakopoulos, our chief financial officer, Gregory Zikos and our general counsel and secretary, Konstantinos Zacharatos. E. Share Ownership The common stock beneficially owned by our directors and executive officers and/or entities affiliated with these individuals is disclosed in “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders” below. Equity Compensation Plans We have not adopted any equity compensation plans. 80
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. Major Shareholders The following table sets forth certain information regarding the beneficial ownership of our outstanding common stock as of February 15, 2012 held by:
•
each person or entity that we know beneficially owns 5% or more of our common stock; • each of our officers and directors; and • all our directors and officers as a group. Beneficial ownership is determined in accordance with the rules of the SEC. In general, a person who has voting power or investment power with respect to securities is treated as a beneficial owner of those securities. Beneficial ownership does not necessarily imply that the named person has the economic or other benefits of ownership. For purposes of this table, shares subject to options, warrants or rights or shares exercisable within 60 days of February 15, 2012 are considered as beneficially owned by the person
holding those options, warrants or rights. Each stockholder is entitled to one vote for each share held. The applicable percentage of ownership of each stockholder is based on 60,300,000 shares of common stock outstanding as of February 15, 2012. Information for certain holders is based on their latest
filings with the SEC or information delivered to us. Except as noted below, the address of all stockholders, officers and directors identified in the table and the accompanying footnotes below is in care of our principal executive offices.
Identity of Person or Group
Shares of Common Stock
Number
Percentage Officers and Directors Konstantinos Konstantakopoulos(1)
15,666,666
26.0
% Gregory Zikos
—
—
(4) Konstantinos Zacharatos
—
—
(4) Vagn Lehd Møller
—
—
(4) Charlotte Stratos
—
— All officers and directors as a group (five persons)
15,666,666
26.0
% 5% Beneficial Owners Christos Konstantakopoulos(2)
15,666,667
26.0
% Achillefs Konstantakopoulos(3)
15,666,667
26.0
%
(1)
Konstantinos Konstantakopoulos, our chairman and chief executive officer, owns 9,074,916 shares directly and 6,591,750 shares indirectly through Kent Maritime Investments S.A., a Marshall Islands corporation. The address of Kent Maritime Investments S.A. is c/o Costamare Shipping Company S.A.,
60 Zephyrou Street & Syngrou Avenue, 17564 Athens, Greece. (2) Christos Konstantakopoulos, the brother of our chairman and chief executive officer, owns 9,074,917 shares directly and 6,591,750 shares indirectly through Vasska Maritime Investments S.A., a Marshall Islands corporation. The address of Vasska Maritime Investments S.A. is c/o Costamare Shipping
Company S.A., 60 Zephyrou Street & Syngrou Avenue, 17564 Athens, Greece. (3) Achillefs Konstantakopoulos, the brother of our chairman and chief executive officer, owns 9,074,917 shares directly and 6,591,750 shares indirectly through Yaco Maritime Investments S.A., a Marshall Islands corporation. The address of Yaco Maritime S.A. is c/o Costamare Shipping Company S.A., 60
Zephyrou Street & Syngrou Avenue, 17564 Athens, Greece. (4) Owns less than 1% of our issued and outstanding shares. In November 2010, we completed a registered public offering of our shares of common stock and our common stock began trading on the New York Stock Exchange. Our major stockholders 81
Beneficially Held
of Shares
have the same voting rights as our other stockholders. As of February 15, 2012, we had 6,339 stockholders of record.